Italy Heads for 2nd Lost Decade, Entire Eurozone on Verge of Contraction


Italy's GDP is still below the 2008 level. PMIs from Germany and Italy show the entire eurozone on verge of contraction.

Italy is back in recession for the third time in a decade. This one may be particularly hard as Italian Manufacturing Shrinks at Worst Rate in Six Years.

  • Italy's purchasing managers’ index (PMI), a measure of business conditions in the sector, sank to 47.8 in January - a sharp drop from 49.2 in December, and below the 50 neutral mark. This meant the sector has been shrinking for fourth consecutive months.
  • Jobs in industry fell for the first time in four years in January as new orders dropped sharply and output was down.
  • New orders fell for the sixth consecutive month, suggesting that output in subsequent months may be lower.
  • The slowing Italian sector dragged on the eurozone overall, which was close to standing still. The overall PMI was 50.5, down from December’s reading of 51.4, increasing the chances that it is now in recession.
  • Germany also dragged on overall eurozone figures, as its powerful manufacturing sector contracted for the first time in four years. Again, this is likely to worsen further as new orders fell as the fastest rate in more than six years.

Eurozone Manufacturing

Those are all considered "soft" data points as the PMI is a diffusion index. However, the soft data matches the hard data as the latter shows Italy suffered second quarter of GDP contraction.

With that, lets dive into the IHS Markit Eurozone Manufacturing PMI for more details.

Key Findings

  • Final Eurozone Manufacturing PMI at 50.5 in January (Flash: 50.5, December Final: 51.4)
  • Output up marginally, but sharpest fall in new work recorded since April 2013
  • Growth sustained via reduction in backlogs and fastest accumulation of stocks in survey history

The headline index has now fallen for six consecutive months and stood in January at its lowest level since November 2014.

Chris Williamson, Chief Business Economist at IHS Markit said: “Worryingly, weaker than anticipated sales mean warehouses are filling up with unsold stock at a rate not previously recorded over the two decades of prior survey history, suggesting firms will need to cut operating capacity in coming months unless demand revives, boding ill for future production growth."

Italy PMI: Bright Spot - Falling Prices

Let's take a quick look at Italy's PMI.

Amritpal Virdee, Economist at IHS Markit, which compiles the Italy Manufacturing PMI survey, commented:

“January's PMI data signalled another deterioration in Italian manufacturing conditions, with firms struggling in the face of a sixth consecutive monthly fall in new business. Decreases in output, purchasing activity and employment (the first in over four years) were recorded, marking a weak start to 2019."

"There was a bright spot, though, with a significant weakening in input price inflation which enabled manufacturers to lower selling prices for the first time in 27 months in an effort to boost sales."

Hmm. I wonder what Mario Draghi thinks about that bright spot.

Germany PMI: Bright Spot - Falling Prices

Rounding out our Eurozone trio, please note that a sharp fall in new orders caused Germany's PMI to fall into contraction territory in January.

Key Findings

  • Steepest fall in new orders for six years
  • Uncertainty, trade friction and autos weakness hit demand
  • Purchase price inflation pulls back to 27-month low

Phil Smith, Principal Economist at IHS Markit, which compiles the Germany Manufacturing PMI survey, commented:

"Thanks to a strong rise in consumer goods output, overall production remained just inside growth territory in January, but there are growing risks to the near-term outlook. Stocks of finished goods rose the joint-most on record, backorders continued to be depleted, and firms' expectations towards future output showed no appreciable improvement from last October's six-year low. The downturn is feeding through to supply chains, with lead-times on purchased items edging closer to stabilisation in January as manufacturers scaled back their demand for inputs. Purchase price inflation has also come down a lot in recent months, offering some respite to any struggling manufacturers."

Too Big to Bail, Too Big to Jail

Italy is in recession with very troubled banks. I commented yesterday, Too Big to Bail, Too Big to Jail.

Germany and and France are on the cusp and Brexit is on the horizon.

Brexit Chicken

Germany will get crushed in a hard, WTO-Brexit because the UK is Germany's biggest export partner.

UK Prime minister Theresa May ought to wake up and take advantage.

In a game of "Brexit Chicken", the UK faces this choice: 1-2 Years of Pain Now vs Permanent Idiocy.

Mike "Mish" Shedlock

Comments (4)
No. 1-3

The only way out for Italy is to return to their own currency Lira and make it freely floating according to markets so when Italy's economy is crap the Lira drops 20-30% compared to Euro and gives Italian companies an advantage in export markets to EU countries and also to outside of EU and also gives Italian made products an advantage against German made products inside Italy.

Euro is a flawed construct only benefiting Germany...


Italy has political and structural problems that were solved in the past by devaluing their currency. Greece has similar ones.

The hope was that the rigor of a German currency would impose a new discipline in the Greeks and the Italians.

Don't get me wrong, I grew up going to Italy and Greece on vacation as a kid and love the people. But they just took the low interest rates, cooked the books and had a great time hoping the bill would come due next month.

The Greeks have been kicked by the mule once, and Italy is looking like it is going to get its first kick.

As Mitch says: "there's no lesson learned in the second kick of the mule".

The Greeks have decided to risk a second kick. The Italians can choose between another kick, learning a lesson, or running back to the Lira so they can ease in and out of solvency every 5-10 years.


Responding to a comment below that the "Euro is a flawed construct only benefiting Germany, I disagree. The US system is flawed because if a state screws up, and bankrupts itself, the rest of the country bails it out, and because, if the government chooses to enact a policy to benefit people in one area, they tax people in the other states to pay for it.

With the Euro, since the economic systems are tied together, but the political systems are not, that can't happen. That is the strength of the system. Countries which are fiscally prudent prosper because others who are not can not take if from them. Meanwhile, countries that are fiscally irresponsible (Greece, Italy) end up, sooner or later, having to pay the price for it.

Global Economics