Italy, Europe’s laggard, is catching up – but only very slowly

Talk about limping over the finishing line. Ten years after the global financial crisis began, Italy’s economy has only just regained its pre-crisis peak, as Neil Williams of Hermes Investment Management points out; major rivals reached this milestone years ago. It’s symptomatic of an economy that has lagged the eurozone and barely grown for almost two decades now.

Now, however, there are signs that Europe’s recovery is finally trickling down to Italy. GDP has expanded for a tenth straight quarter, growing by 0.4% between April and June. The economy is on track for growth of 1.5% this year.

Employment has inched above 23 million for the first time since 2008. The unemployment rate rose to 11.3% in July from 11.2% the previous month, but that was due to 115,000 people joining the labour market, as The Economist points out. Italians “seem to be more hopeful that there are at last jobs to be had”.

Easier credit is also on the horizon now that the economy is rebounding and the bad loans clogging up the banking sector are being addressed. “Italian banks are out of the emergency room”, as Paul Davies puts it in The Wall Street Journal. Dud loans are now being sold, restructured or written off. Banks returned to growth earlier this year after “years of near-constant balance-sheet shrinkage”.

Another reason for optimism is political. A key worry has been that elections due next year could greatly strengthen two anti-euro populist movements; one, the Five Star Movement, which is leading in some polls, has called for a referendum on the single currency, which is highly unlikely to survive a huge economy’s exit. But now Five Star has retreated from this position, says James Politi in the Financial Times. It says a plebiscite would only be a last resort and a bargaining chip to persuade Brussels to relax its fiscal rules. Similarly, the Northern League, which used to insist Italy should just walk out of the euro, now says it would rather prepare for a collapse of the euro rather than cause it.

All very well, says The Economist, but Italy still has a great deal of work to do. Labour-market reforms and further deregulation of various sectors, which would bolster long-term growth, remain far from complete, while the stronger euro will temper export growth. The hung parliament likely to result from the election next year is unlikely to be able to pass important reforms. “Keep that prosecco on hold.”    

Spanish stocks are a bargain

Spain is on a roll. GDP, which collapsed by 10% during the property and banking crisis, is on track to rise by 3% this year. Tourists have arrived in record numbers, while a weaker euro in recent years has boosted exports. On the domestic front, the banking sector has been recapitalised and corporation tax cut, while the government has made it less expensive to fire permanent workers. These structural reforms, along with deleveraging by companies and consumers since 2010, have given the cyclical upswing an additional fillip.

Spanish equities are not only a good domestic growth play, but they could also prove “a rewarding way of playing a  stronger eurozone”, according to Richard Barley in The Wall Street Journal. Financial stocks are unusually heavily represented in the local index, and banks should benefit from the prospect of higher government bond yields (implied long-term interest rates) as the European Central Bank gradually winds down its quantitative-easing programme. Spanish stocks are also cheaper than the eurozone as a whole, and remain some way off their recent peak.

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