A good start for Italy's third quarter and the strong rebound in production might just push the average 2020 growth contraction below 10% if no national lockdowns are further imposed in 4Q. But don’t call it a V-shaped recovery.
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Stronger than expected industrial production increase in July
The rebound in Italian industrial activity continued in July.
Data from the Italian statistical agency shows that production increased by 7.4% month-on-month in seasonally adjusted terms, clearly surpassing expectations. The working days adjusted measure contracted by 8% YoY, again a neat improvement over June’s reading.
A quick look at big aggregate shows that investment goods (+11.8% MoM) were driving the improvement, followed by intermediate (+7.7% MoM) and consumer goods (+6.2% MoM); only energy was nearly flat (+0.1% MoM).
Today’s release is the second piece of hard data providing evidence of an ongoing solid rebound of activity in 3Q20.
July labour market data had also been comforting
Labour market data for July had already signalled that re-openings have been bringing about a gradual normalisation in the labour market.
As lockdowns eased, many individuals who had become inactive during the lockdown started actively searching for jobs, pushing the number of unemployed people up by 5.8% MoM (or 134K headcounts) and a few of them even moved to the employed pool (+0.4% MoM, or +85 K headcounts).
The combined effect of short-work schemes and the redundancy ban played out well, limiting unemployment and providing revenue support which will help a decent rebound of private consumption in 3Q20.
To be sure, retail sales contracted by 3.1% MoM in volume terms in July, but this should be read as a pause after the strong rebound in May and June rather than evidence of a turnaround in the recovery.
3Q20 rebound looks set to be strong
Evidence for 3Q20 seems thus to support the idea of a strong GDP rebound after the worst ever 12.8% QoQ contraction of 2Q20.
Confidence has recovered both in manufacturing and services but lost some momentum in August when the synthetic Economic Sentiment Indicator stood some 20% lower than in pre-COVID times.
To be sure, the manufacturing PMI reached in August 53.1 - the highest level since June 2018, but in these times, this what this indicator depicts should be taken with a big pinch of salt.
Don’t call it a V-shaped recovery
Let’s be clear. A likely 3Q20 strong rebound should not be read as indisputable evidence of a V-shaped recovery.
Unfortunately, the epidemic is far from over, and the risk of new outbreaks over the fall season remain. While consumer confidence has regained some ground, consumers remain very concerned about future unemployment, possibly reflecting their awareness that artificial support to the labour market, which has been recently re-funded until the end of the year, cannot last forever.
Last, but not least, the ultimate damages of the pandemic on the fabric of the Italian economy are simply not known: having avoided a liquidity crisis at the height of the crisis is no guarantee that solvency issues will eventually be avoided. We will know more about this over 4Q20 and 1Q21.
Today’s strong production data adds upside risk to our -10.2% base case average GDP contraction for 2020
We are currently assuming that the recovery will continue also in 4Q20 if at a markedly decelerating pace, provided that a national lockdown isn't imposed.
This would bring about an average GDP contraction of 10.2% for the Italian economy.
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