“Recession In Italy …”

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Recession In Italy

On Thursday the European Commission slashed its forecasts for Italy’s economic growth in 2019 and 2020, saying the uncertainty over government policies and higher borrowing costs have pushed the country into a recession.  On Monday, borrowing costs in Italy rose to their highest level in three weeks amid heightened concern that a deteriorating economic outlook will worsen the fiscal position of the country.  Last week data confirmed Italy is in recession in the fourth quarter of 2018, while manufacturing contracted in January indicating that things could worsen for the economy.  Weaker data has bolstered Eurozone bond markets as investors expect the European Central Bank to keep interest rates low in the long term.  Weak data has increased the concern of a further deterioration in public finances and fuelled speculation about further budget measures.  Italy is one of the most indebted countries in the Euro Area standing at some 1.5 trillion euros. Last month the Bank of Italy cut its 2019 economic growth forecast to 0.6 percent from 1 percent.  The 10 year yield rose almost eight basis points to 2.806 percent before drifting lower to around 2.72 percent.  After a heavy sell-off, bonds across the curve found more stable ground, where the two and five year yields also fell.  They remained within sight of three weeks highs. On Wednesday Italy’s Treasury launched a new 30-year syndicated bond sale.  Italian government bond yields rose across the curve ahead of the sale of the 30 year syndicated debt issue that will test the market appetite for debt from Italy.   The yield on the outstanding 30 year bonds reached a three-week high of 3.695 percent up four basis points.     According to Commission Vice President Valdis Dombrovskis, “what Italy needs is deep structural reforms and decisive action to bring down high levels of public debt, in other words, responsible policies that support stability, confidence and investment”.  The Commission forecasts that quarterly growth in Italy would be zero in the first three months of this year and just 0.1 percent in the second quarter against the previous quarter.  Economy Minister Giovanni Tria played down the economic difficulties stating that growth had stalled but it was wrong to say the country was in recession.  The weak economic performance raises questions over how Italy can deliver the planned budget deficit of 2.04 percent of GDP this year, a compromise agreed with the Commission last year.

EU Commission Slashed Growth Forecasts

The European Commission slashed its growth forecasts for all the euro region’s major economies from Germany to Italy and warned that Brexit and the slowdown in China make the outlook look even worse.  On Thursday the European Union’s executive arm delivered a downbeat report taking off a percentage off its 2019 projection for Italy.  Italy’s downward revision was the sharpest from the previous forecast of 1.2 percent to 0.2 percent.  The lower outlook comes after officials in Brussels warned that the outlook for the region faces “substantial” risks.  The attributing factors for the weakness in the region at the end of 2018 are the political instability that rocked Italy, violent protests in France that depressed output, and the car industry in Germany struggled to rebound from changes in regulation.  Furthermore, the slowdown in China and the uncertainty caused by the trade war add to further risks.  In its forecasts, the commission sees the 19 nation euro economic economy expanding 1.3 percent this year down from 1.9 percent as projected in November.  Meanwhile, for 2020 it sees growth of 1.6 percent down from 1.7 percent earlier forecast.   The commission said that “much of the euro area’s loss of growth momentum can be attributed to fading support from the external environment, including slower global trade growth and high uncertainty regarding trade policies.”  According to the report, “In the US, the risk of an abrupt fiscal tightening appears to have increased, especially for 2020”.  “The Chinese economy might be slowing more sharply than anticipated while many emerging markets are still vulnerable to sudden changes in global risk sentiment.”  According to the commission Brexit remains a source of uncertainty.  The commission cut its 2019 euro-area forecast to 1.4 percent, down from 1.8 percent in earlier projections.  The ECB aims to get inflation to just below 2 percent over the medium term.

BREXIT

On Wednesday European council president Donald Tusk said the European Union will make no new offer on Brexit and those who promoted Britain’s exit without any understanding of how to deliver it deserve a “special place in hell”.  As companies and governments across Europe step up preparations for a disorderly no-deal Brexit, diplomats and officials said Britain now faces three main options, a no-deal exit, a last-minute deal or a delay to Brexit.  In a joint news conference with Irish Prime Minister Leo Varadkar, Tusk said, “I’ve been wondering what that special place in hell looks like, for those who promoted Brexit, without even a sketch of a plan how to carry it out safely.”  The remark by Tusk, who chairs summits of the EU’s national leaders, angered Brexit supporters in Britain.  While Tusk was clear the EU would not reopen the divorce deal, he also said he still believed a common Brexit solution was possible.  Varadkar said Britain’s political instability further proved the need for a “backstop” insurance policy, which is the main obstacle to a deal, to keep the border between Ireland and British –ruled Northern Ireland open after Brexit.   European Commission President Jean-Claude Juncker said that the legal withdrawal agreement would not be reopened and May knew that.  Rating agency Standard and Poor’s said a no-deal Brexit could result in negative revisions of their outlooks on Britain’s credit ratings, but there remained a very strong incentive for both sides to reach a deal. German Chancellor Angela Merkel said on Thursday she believes a solution to the Irish border issue can be reached in Brexit negotiations without opening the Withdrawal Agreement on Britain’s departure from the European Union.  Merkel who was in Bratislava said that Britain and the remaining 27- member of the EU all have an interest in an orderly Brexit.   On Thursday May, was in Brussels to plead with EU leaders to change the Brexit divorce deal she negotiated last year, in order to get it through parliament, after they offered little hope they were willing to do so.  Lawmakers will debate a parliamentary motion on Britain’s exit from the European Union on 14th February said in a post Andrea Leadsom, the leader of the House of Commons.   After Thursday’s meeting, Juncker and May issued a joint statement after what was called a “robust” discussion.  It set out her demand for a legally binding change to the “backstop” plan to avoid customs on the Irish border and her insistence that the other 27 EU member states would not reopen that agreement.  May said, “what I see and hear from leaders is a desire for us to work together to ensure that we can deliver the UK leaving the European Union with a deal.” She will meet Juncker again before the end of the month as time is short before the end of March deadline.  Tusk in a cautious tweet said “Still no breakthrough in sight. Talks will continue.”

Germany

Data confirmed the fear of a slump in Europe after Germany’s economy slowed in December.  Germany, which is Europe’s largest economy, is struggling with the slowdown in the global economy and the trade war between the US and China.  The euro was down 0.2 percent at $ 1.1346, which is a two week low, after German industrial output unexpectedly fell in December for the fourth consecutive month.  The 0.4 percent monthly fall was below the forecast increase of 0.7 percent and follows a 1.6 percent monthly drop in industrial orders as published on Wednesday.

Bank Of England And The UK Outlook

The Bank of England (BOE) said that the UK is facing the weakest economic growth in 10 years in 2019, amid Brexit uncertainty and global slowdown.  Whereas other central banks said they will hold off from raising borrowing costs, the BOE is stuck to its message that interest rates will rise if a Brexit deal is achieved.  Meanwhile, the Bank’s policymakers voted unanimously to keep rates at 0.75 percent.  After the vote, BOE Governor Mark Carney said that, “the fog of Brexit is causing short-term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business”.  On Thursday BOE slashed its 2019 economic growth forecast to 1.2 percent from its previous estimate of 1.7 percent made in November 2018.  This represents the biggest cut in projections since exactly after the 2016 Brexit referendum and put Britain on course for its weakest economic growth in the 10 years since the global financial crisis.  The BOE saw a fall this year in business investment and housebuilding, which has been weak in the run-up to Brexit.  The growth rate in exports halved showing the global slowdown.     The 10-year British government bond yield fell to its lowest level so far this year at 1.158 percent, falling 5 basis points on the day, a reflection of the weaker outlook by the BOE.  Sterling dipped a quarter of a cent against the dollar but recovered quickly recouping those losses, leaving it at a two-week low of $1.2888.

President Trump’s State of Union Address

In his state of the union speech President Donald Trump vowed to build a border wall, wish is a source of deep partisan divide and said that Democratic attempts at “ridiculous partisan investigations” could damage US prosperity. During his 82-minute speech, he outlined his political priorities without providing specific policy details.  He called illegal immigration “an urgent national crisis” but stopped short of declaring a border emergency that would allow to bypass Congress for wall funding.  Instead he urged Democrats and Republicans to find a compromise by the 15th February deadline.  Democrats see the wall as a waste of money and ineffective.  In his speech Trump made reference to economic accomplishments such as unemployment near a five-decade low and manufacturing job growth amongst them.  Trump’s speech was light on new initiatives to further stoke growth in an economy seen as losing momentum in 2019.   A large section of Trump’s speech was devoted to foreign policy, saying a trade deal was possible.

Australia

The Australian dollar weakened further on expectations that interest rates will go down this year amid growth risks, domestically and abroad. In a remarkable shift from its long standing tightening bias, on Wednesday the Australian central bank opened the door to a possible rate cut and acknowledged threats to the economy.  Australia’s benchmark stock index jumped 1.2 percent on the news of an ease in monetary policy after the country’s central bank chief shifted away from his previous tightening bias.     On Thursday the Aussie hovered near a more than one-week low at $0.7103.

Markets Wrap

On Monday, the strong dollar rose oil prices and US Treasury yields held on to recent gains, putting pressure on emerging markets, as currencies and stocks fell.  On Tuesday, sterling fell to a near two-week lows after a survey showed firms in the dominant services sector in Britain reporting job cuts for the first time in six years.  A closely watched gauge of the UK, the IHS Markit  fell to 50.1 in January from 51.2 in December, its lowest level since July 2016 and moved barely from the 50 mark that separates growth from contraction.  On Tuesday British blue-chip shares surged to their highest in nearly three months as energy giant BP doubled its annual profit and miners rallied on higher iron ore prices, while weaker pound was also supportive.  Other European indices rose as well over one percent.  Meanwhile, Wall Street built on the previous day’s gains in early New York business ahead of US president Donald Trump’s State of the Union address.  On Wednesday European shares rose to touch 12 week highs, amid strong gains in Italian banks and tech stocks.  On Thursday European shares eased from a 12 week high as weak earnings from Publicis, GEA and TUI offset gains in banks following better-than-expected results from Italy’s Unicredit.  Unicredit stock price rose 2.7 percent.  Germany’s DAX was 0.5 percent lower after disappointing December industrial output numbers for Germany reinforced worries about the cooling global outlook.  Investors are also concerned about the talks between China and the United States next week.  Washington will impose a new batch of tariffs on Chinese goods on 2nd March.  Meanwhile, the euro fell to a two-week low on Thursday, after the European Commission sharply cut its forecasts for economic growth in the Eurozone.     The pound was struggling near $1.29 again ahead of a Bank of England meeting.

Oil

Oil hit a two-month high reaching $64 a barrel, as OPEC-led supply cuts and US sanctions against Venezuela’s petroleum industry offset expectations of weaker demand and an economic slowdown.  In January, OPEC and its allies began a new round of supply cuts.  The curbs led by Saudi Arabia have been compounded by involuntary losses that the Venezuelan sanctions could deepen.  Brent crude the global benchmark hit $63.36 a barrel, the highest on 7th December and on Monday increased to $62.98.  News that oil giant BP doubled its profits and the increase in crude prices, pushed the oil and gas sector up 1.5 percent.  On Wednesday oil fell below $62 a barrel after a report showed a rise in US crude inventories, while concerns about the impact on global supplies of US sanctions on Venezuela faded.  US crude inventories rose by 2.5 million barrels last week, according to industry group the American Petroleum Institute, and gasoline stocks also increased.  Brent crude slipped 49 cents to $61.49 a barrel while US West Texas Intermediate crude was down to $53.11.  Prices have been supported by OPEC and its allies, including Russia.  Venezuela which is an OPEC member, is like Iran and Libya exempt from making voluntary curbs under the deal.  On Thursday oil prices fell after data showed a rise in US inventories weighed on sentiment which is already rattled by the slowdown in the economy.

Malta: Inbound Tourism December 2018

Total inbound visitors for December were estimated at 122,759, an increase of 11 percent when compared to the corresponding month in 2017.  Inbound tourists from EU Member States went up by 8.9 percent to 101,792 when compared to the corresponding month in 2017.

Malta:  Index Of Industrial Production December 2018

In December 2018 the seasonally adjusted index of industrial production decreased by 5.1 percent over the previous month.   When compared to December 2017, the index of industrial production adjusted for working days decreased by 2.6 percent.  Decreases where registered in the production of consumer goods, intermediate goods and energy.

Antonella Mercieca

Client Relationship Manager

Source:

Bloomberg, Reuters, https://nso.gov.mt

Date:

February 8th, 2019


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