Italian IP Continues to Settle Lower

Italian industrial production in manufacturing fell by 3.4% in January following a 1.1% decline in December and a 1.5% gain in November. This series for manufacturing industrial production declines at 11.6% annual rate over three months, at an 8.3% annual rate over six months, and at a 2.4% annual rate over 12 months. Italian industrial production is sequentially decelerating: the more recent, shorter-period growth rates are weaker than the longer growth rates indicating progressive deterioration in Italy's manufacturing sector momentum. The current observation is for January 2022; with one month into the new quarter, industrial production is falling at a 20% annual rate early in 2022 Q1.

Sector trends Declines in January permeate the index; there's a 3.6% decline in consumer goods output, a 1.6% decline in capital goods output, and a 3.4% decline in the output of intermediate goods. In December, the weakness is widespread again this time with consumer goods output flat and with a 2.2% decline in capital goods and a 0.6% decline in intermediate goods. In November, conditions are slightly more mixed, but more upbeat, with consumer goods output down by just 0.2%, capital goods output up by 2%, and intermediate goods output up by 0.7%.

However, looking at the table, there are still sequentially deteriorating rates of growth for consumer goods and for intermediate goods in which the shorter, newer growth rates continue to show weaker and weaker results. The exception is for capital goods but it's not much of an exception because for capital goods there is a 12-month decline of 2.8%, over six months a decline at a 7.7% annual rate over emerges, and over three months that is only slightly improved to -7.1% - but that's still a severe downturn. It's still a rate of decline that's much greater than the 12-month rate.

Quarter to date Consumer goods are declining at a 20.2% annual rate in the quarter to date. Capital goods output is declining at a 13.5% annual rate in the quarter to date while intermediate goods are declining at 19.7% annual rate. Obviously, the quarter-to-date data show severe and consistent weakness across sectors; there really isn't any exception and there isn't a strong sector.

Transportation There are separate figures for the transportation industry, and there is some strength there. Transportation shows gains month-to-month in January, December and November. Transportation output is accelerating with the -1.3% change over 12 months, a 1% annual rate gain over six months and a huge 26.5% annual rate gain over three months. However, even with this sector embedded in the totals, manufacturing continues to decline into show sequential weakness.

Other industrial measures The manufacturing PMI declined by 5.9% in January; it declined by 1.3% in December but did make a 2.8% increase in November. However, there is sequential deterioration as the manufacturing PMI goes from a gain of 5.7% over 12 months to a declining pace of 6.5% over six months and the declining pace accelerates to 17.1% annualized over three months. The PMI reinforces news from the headline showing weak output and progressively weakening output. The EU Commission statistics on industrial confidence for Italy are contrary to this; they show a 12-month level of confidence at 6, over six months they show average confidence higher at 9.2, and the three-month average is at 9.9. All of these are averages so according to the EU data industrial confidence in Italy has been progressively improving. However, industrial output percentage changes in totals as well as by sector, show the opposite: progressive deterioration. Also, the Italian manufacturing PMI from Markit shows progressive deterioration. The EU confidence measure must be picking up abstract optimism not on-the-ground reality.

And there is inflation... On the same timeline, there's, of course, rampant inflation and it is rising because of supply problems because of high oil prices and for Italy we see a 13% annual rate over 12 months, we see another 13% annual rate over six months and that climbs to a 14.6% annual rate over three months. Italian inflation shows a slight tendency to accelerate; it clearly is stuck at a very high level. In the quarter to date, it's up to a 17.5% annualized pace. Inflation continues to be a problem in the industrial sector for Italy as it is in much of the rest of the world.

Other issues...virus Of course, Italy continues to be buffeted by a host of special problems. Oil prices are extremely high, and Italy is dependent on imported oil. The war in Ukraine continues to rage on, and with that, there is concern about future oil supplies as well as impacts on supplier deliveries. At the same time, the new Covid variant (Omicron BA.2) has begun to rekindle infections in the Italian economy. Italy is coming off an extremely high spike of infections in January and February. That spike gave Italy the highest levels of infections that Italy had seen since COVID began because the Omicron variant was so transmissible. Now with the newer variant circulating, Italy is seeing the second highest incidence of infections already. As of late-March, Italy has another virus problem. This virus has not been as damaging; it does not have the same impact on death rates. In fact, the death rate in Italy continues to edge to lower levels even in the wake of the previous infection spike from Omicron and in the face of a rekindling of infections from the new variant. The death rates overall - even for the earlier sharp spike in infections - were below the previous peaks for death rates in Italy. But the circulating Covid variant creates another challenge for Italian policymakers and a potential problem for Italian growth.