Mambo Italiano! Italy Falls Into Recession (Again) as Output Shrank More Than Forecast (Italian Bank Assets Plummet, ECB Ineffective)

It is the continuing mambo of Italy falling into recession.

(Bloomberg) —  Italy fell into recession at the end of 2018, capping a year of political turmoil, higher borrowing costs and fiscal tensions that took their toll on the economy.

Output contracted 0.2 percent in the three months through December, following a 0.1 percent fall in the previous quarter, statistics agency Istat said Thursday in Rome. The year-end shrinkage was greater than expected. 

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The data “reflect a marked worsening of the industrial sector’s performance, and of a negative contribution of agriculture,” Istat said in releasing the data. It said services’ activity “stagnated.”

Premier Giuseppe Conte said Wednesday that he expected the fourth-quarter shrinkage, speaking in Milan a day before the official announcement.

Investors have been warily watching Italian economic performance following weeks of negotiations with the European Union over the government’s budget that pushed up bond yields. The latest round of bad news is likely to test market confidence in the government’s expansive program for 2019.

The fourth-quarter contraction was greater than a median estimate in a Bloomberg survey of 28 analysts that called for a quarterly shrinkage of 0.1 percent. The economy expanded 0.1 from the same quarter of 2017, while the full-year growth totalled 0.8 percent on a work-day-adjusted basis. 

The December unemployment rate fell to 10.3 percent, Istat said earlier in the day.

In addition to output declining (resulting in a real GDP QoQ reading of -0.20%), total assets of Italian banks have been plummeting. On the bright side, bank nonperforming loan rates are falling (but are still quite high at 14.4%).

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All this despite the ECB’s Main Refinancing Operations Annoucement Rate of … 0%.

Italy’s sovereign yield curve remains steeply upward sloping with short rates negative (courtesy of the ECB). 10Y SR CDS for Italy is 242.8 (elevated risk).

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Italy shows the limits of central bank zero-interest rate policies. Perhaps ECB head Mario Draghi should sing “Mambo Italiano” instead of distorting economies and asset prices.

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