Economy in Brief

OK…the earth is not flat. No one is falling off ‘the edge.’ But the decline in Italian IP across sectors is abrupt and the fall is sharp as though it has fallen into some sort of abyss. The chart is very telling. The table is too. The table is ‘coded’ with negative values in red except for ranking data where values are red when they are below their respective medians (below 50%). Among 45 categories in the IP portion of the table, only four are positive! In the lower portion of the table, the indicators and their standings show 27 observations of which four are not negative and among those four, three are zero. None of this is reassuring. Italy is experiencing some sudden broad weakness after having shown a good degree of resiliency. Manufacturing IP as well as two of its three main sectors – as well as transportation- show ongoing decelerating trends.

There is little here to equivocate on. Everything is weak and most categories are showing sequential worsening. Quarter-to-date growth rates for IP or changes in the indicators are negative everywhere except for manufacturing IP. Compared to the January 2020 level of IP categories or of survey values, all observations are weaker than their levels of five years ago. That is almost breath-taking. That’s half a decade.

Ranking data are largely at or below their 25th ranking percentile. Six of the eight categories show rank percentile standings below their 15th percentile.

Outlook/assessment Much of Italy’s weakness is new. Since January 2020, IP is lower by 10%, but over the last 12 months it is down by 8.4% - that is the bulk of that net drop. Transportation output is down by 13.7% since January 2020 and by 19.4% over the last 12 months. Indicators show the EU index for the industrial sector in Italy lower by 4 points from January 2020 and down by 1.7 point over 12 months. Italy’s ISTAT index has fallen 5 points over 12 months and the bulk of its 6-point drop since January 2020. The ISTAT outlook for production is down by 2 points over 12 months and lower by 7 points since January 2020. On balance, Italy’s industrial sector is looking extremely weak. It seems to be under new and severe downward pressures. At a time of global weakness and ongoing manufacturing weakness, this remains a sector to watch closely.

Business confidence in Australia rose according to the National Australia Bank (NAB) Business Survey, but business conditions in January eased to a +3.2 reading from +6.2 in December. At that level, they are a tick above their November reading but still well below their respective, 3-month, 6-month, and 12-month averages. On the same tenor of comparison, confidence is higher in January while business conditions are eroding.

The components of the index are broadly weaker in January with only 31.3% improving, after 75% improved in December, following 25% improving in November. That’s a somewhat jagged past to disentangle. However, looking at improvement over 12-months compared to 12-months ago, six-months compared to 12-months, and 3-months compared to 6-months, we see the breadth of improvement rising from 37.5% over 12 months to 50% over six months to 68.8% over three months.

Still, the average business conditions readings are sequentially easing, profitability is sequentially easing, so are trading conditions, labor costs, purchase costs and capacity utilization. Items that are sequentially strengthening (or easing by progressively less) are forward orders, exports, and exporters’ sales.

The ranking of the various components shows a narrow group of categories with readings above their medians (above a ranking of 50%) involving prices, costs, and capacity (labor costs, purchase costs, prices, capacity utilization, and stocks). However, employment was close to a 50-percentile standing, at 49.8. This is broadly true, globally, as unemployment has remained low and the labor markets have generally remained strong even in the face of sub-par economic growth, especially in the manufacturing sector.

Compared to the period before COVID struck only six categories are higher – five years later. Stocks are higher by 4 points and employment by 5.8 points; the rest (labor costs, purchase costs, prices, and capacity utilization all are higher by less than one point). Profitability, forward orders, and capital expenditures are each down by more than 5 points on this timeline comparison.

On balance, Australia is still struggling. Confidence is improving but current business conditions are weakening. It’s not clear how that will sort out. Also, the confidence metrics are broadly weak with upward pressure most prevalent on prices and costs, unfortunately. Globally conditions remain touch and go with a good deal of weakness still prevalent and much of the world is bracing for what U.S. tariff policy might do. The current situation is difficult, and the outlook calls for caution.