The return of Super Mario - Capital Economics
European Economics

The return of Super Mario

European Economics Weekly
Written by Jessica Hinds

Mario Draghi is looking increasingly set to become the next Italian prime minister, leading Italy’s recovery from the pandemic. That is likely to entail more fiscal stimulus, but structural reforms that transform Italy’s longer-term prospects are probably too much to hope for, even from Super Mario. Meanwhile, data out next week are likely to confirm the resilience of industry at the end of 2020.

Sequels all too often end up disappointing, so Mario Draghi will be hoping that his return to the euro-zone’s centre stage little more than a year after he stepped down as ECB President proves the exception to the rule. But if “saving the euro-zone” was a challenge, leading Italy out of a pandemic-induced crisis might be another altogether.

Draghi is by no means guaranteed success in building a coalition, although with Berlusconi’s support now, his chances have improved. And it is hard to think of a better candidate. He arguably has the space to implement the fiscal stimulus that Italy needs and is well placed to ensure that it reaps the benefits of the EU’s Recovery Fund.

A deeper-seated transformation of the Italian economy through structural reforms would require plenty of time in power and a strong coalition. Neither seems assured. (See here.)

The prospect of Mr Draghi at the helm has certainly gone down well among investors, with the spread of Italian 10-year government bond yields over Bunds narrowing to less than 100bps yesterday. Yet in the long run, we doubt that yields would be much lower under Mr. Draghi than anybody else as the main driver of yields remains the ECB. (See here.)

Inflationary pressures are not building

On the face of it, the jumps in the euro-zone’s headline and core inflation rates in January, to 0.9% and 1.4% respectively, appeared to threaten our view that inflation would remain low this year. But having taken a detailed look at the data provided by statistics offices in Germany, France, Italy and Spain, we are relatively reassured.

Admittedly, methodological changes that took effect in January, and which boosted the inflation rate, mean that inflation is likely to be higher this year than we had previously expected. (See here.) But this will fall out of the annual comparison next year. Moreover, the other factors driving up inflation in January were higher energy inflation, and the delayed winter sales temporarily pushing up clothing and footwear inflation. As a result, we are comfortable with our view that we are not on the verge of a sustained rise in inflation that would warrant the ECB to change course.

Summer postponed?

Confirmation came this week (as if any were needed) of the catastrophic year that Spain’s tourist industry has had. The number of foreign visitors slumped by 77% last year to 19 million, the lowest since 1969. Spending was just 21% of what it was in 2019.

The recent emergence of new variants, alongside the slow vaccination programmes in mainland Europe, poses a substantial risk to this year’s summer season. Governments are likely to be more cautious in lifting international travel restrictions, even for those coming from elsewhere within Europe.

As a result, the southern Mediterranean economies, for which summer tourism represents an important part of GDP, may face yet another write-off year. (See here and Chart 1.) If restrictions were to only be lifted from September rather than in Q2, this could directly knock over 3%-points off overall Spanish GDP growth in 2021.

Chart 1: Illustrative Scenarios for Spain Foreign
Tourist Spending (€m)

Source: INE, Capital Economics

The week ahead

Next week is a quieter week on the data front, with national German industrial production data for December expected to show manufacturing held up well at the end of 2020. Meanwhile, we will continue to watch political developments in Italy.


Data Previews

German Industrial Production (Dec.) Mon. 8th Feb.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Industrial Production m/m (y/y)

07.00

+0.9%(-2.6%)

+0.1%(-1.1%)

+2.5%(-1.2%)

Another increase

We think that industrial output probably increased in December and that the sector will continue to hold up well in Q1 this year.

Industrial production rose by 0.9% m/m in December. This was a seventh successive monthly increase although it left production 3.8% below its pre-coronavirus level from last February.

The industrial sector has been almost immune from the recent, fairly severe lockdown in Germany. Unlike during the first lockdown, there have been no anecdotal reports of factory closures. And the business surveys suggest that demand has remained strong and growth robust. (See for example, the manufacturing expectations component of the Ifo Business Climate Index – Chart 2.)

Th only notable indicator that things have weakened is that industrial orders fell in December, by 1.9% m/m. But this index has a weak correlation with monthly production figures.

During Q1 we expect industrial production to hold up well but it is unlikely to continue expanding rapidly. We think GDP as a whole will contract.

Chart 2: Germany Ifo Manufacturing Expectations & Industrial Production

Sources: Refinitiv, CES-ifo


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 8th

Ger

Industrial Production (Dec)

08.00

(07.00)

+0.9%(-2.6%)

+0.1%(-1.1%)

+2.5%(-1.2%)

Spa

Industrial Production (Dec)

09.00

(08.00)

-0.9%( -3.8%)

EZ

ECB’s Lagarde speaks at EU Parliament

17.15

(16.15)

Tue 9th

Ger

Trade Balance (Dec, sa)

08.00

(07.00)

+€16.7bn

Ita

Industrial Production (Dec)

10.00

(09.00)

-1.4%(-1.2%)

+0.6%

EZ

ECB Household Sector Report (Q3)

11.00

(10.00)

Wed 10th

Ger

CPI (Jan, EU Harm., Final)

08.00

(07.00)

+1.4%(+1.6%)p

+1.4%(+1.6%)

+1.4%(+1.6%)

Fra

Industrial Production (Dec)

08.45

(07.45)

-0.9%(-4.6%)

Por

CPI (Jan, EU Harm., Final)

12.00

(11.00)

-0.3%(+0.2%)p

-0.3%(+0.2%)

EZ

ECB’s Lagarde speaks with The Economist

14.00

(13.00)

Thu 11th

Net

CPI (Jan, EU Harm.)

07.30

(06.30)

+0.5%(+0.9%)

EZ

EC Publishes Winter Economic Forecasts

11.00

(10.00)

Fri 12th

Spa

CPI (Jan, EU Harm., Final)

09.00

(08.00)

-0.3%(+0.6%)p

-0.3%(+0.6%)

-0.3%(+0.6%)

Selected future data releases and events

Mon 15th

EZ

Trade Balance (Dec, sa)

11.00

(10.00)

+€25.1bn

EZ

Industrial Production (Dec)

11.00

(10.00)

+2.5%(-0.6%)

-1.0%(+1.0%)

Tue 16th

Net

GDP (Q4, Prov., q/q(y/y)

09.30

(08.30)

+7.8%(-2.5%)

EZ

Employment (Q4, Prov., q/q(y/y)

11.00

(10.00)

+1.0%(-2.3%)

EZ

GDP (Q4, 2nd Est. q/q(y/y)

11.00

(10.00)

-0.7%(-5.1%)p

-0.7%(-5.1%)

Fri 19th

Fra

CPI (Jan, Eu Harm., Final)

08.45

(07.45)

+0.3%(+0.8%)p

+0.3%(+0.8%)

EZ

Markit Manufacturing PMI (Feb, Flash)

10.00

(09.00)

54.8

EZ

Markit Services PMI (Feb, Flash)

10.00

(09.00)

45.4

EZ

Markit Composite PMI (Feb, Flash)

10.00

(09.00)

47.8

*m/m(y/y) unless otherwise stated. p=provisional. Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q(%y/y) unless stated

Latest

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2019

2020

2021

2022

GDP

-0.7(-5.1)

-0.7(-5.1)

-0.5(-2.7)

+2.2(+12.6)

+2.2(+2.3)

+1.1(+5.0)

+1.3

-7.0

+4.0

+4.0

Household Spending

+14.0(-4.6)

-2.5(-7.0)

-0.7(-3.4)

+2.5(+13.1)

+2.4(+1.6)

+1.8(+6.1)

+1.3

-7.9

+4.1

+4.8

HICP (%y/y)

+0.9 (Jan)

-0.3

0.9

1.6

1.7

2.0

+1.2

+0.3

+1.6

+0.7

Unemployment Rate (%)

8.3 (Dec)

8.4

8.6

8.8

8.6

8.4

7.6

8.0

8.5

8.0

Depo Rate, end period (%)

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

10yr Bund Yield, end period (%)

-0.44

-0.58

-0.45

-0.47

-0.48

-0.50

-0.19

-0.58

-0.50

-0.50

$/euro, end period

1.20

1.22

1.21

1.22

1.24

1.25

1.12

1.22

1.25

1.30

£/euro, end period

0.88

0.89

0.88

0.88

0.89

0.89

0.85

0.89

0.89

0.90

Sources: Bloomberg, Capital Economics


Jessica Hinds, Europe Economist, jessica.hinds@capitaleconomics.com