18 chilly months ahead
All over the world, one can feel that work needs to be done to keep growth going. Our assessment remains that the eurozone will have the toughest time, and now I see cold headwinds well into 2025 i.e. another 1½ year.
Graph one illustrates the situation in the eurozone, showing an overall picture of confidence in the economy among a number of business sectors and consumers. At the start of this year, the morale was high because there was a general expectation of lower inflation which gave off a rather false sense of optimism.
Unease in economies
It surprised many when Europe’s largest economy slipped into an economic hole with negative GDP growth. Getting out of that hole requires an act of strength which Germany does not possess at the moment. This applies not only politically, but also, in reality, economically.
Germany can open the floodgates to public finances, but this will require the German parliament to once again lift the debt brake temporarily, and we don’t trust German Finance Minister Christian Lindner (FDP) is in the mood for that. This has become very clear after the ruling in the Federal Constitutional Court on the 15th November 2023, that leaves an even bigger hole in the public finances.
The classic impetus in Germany is exports, but with global prospects looking chilly, the German economy looks stagnated more than anything else. Overall, German households have savings to spend, but several surveys show that concern has taken over among German consumers, which means it’s hard to hope for any macroeconomic support.
The eternal weak spot in the European economy, Italy, can now boast of not having as poor of a GDP growth as Germany. There has been some budgetary discipline, but it only goes from a too-large deficit in government finances to a not-so-large deficit during ordinary periods. But one must consider that in the years 2020-2022, Italy has had an annual GDP budget deficit of 8-10 per cent GDP, which is completely unsustainable.
If one leaves through the latest economic report on Italy prepared by the International Monetary Fund (IMF), it gives a fine impression of the challenges in the country. The report was published on 26th July and is still relevant.
There are always positive developments to report, but the list of challenges for the economy is endless. Graph two shows how the country’s business community is becoming increasingly more pessimistic; though at par with the rest of the eurozone, the economic outlook in Italy is riskier, as the IMF points out.
Overall, the Italian GDP growth is still on its way down to a lower level, but we don’t see any indications of how one could imagine a turnaround. On the contrary, the report confirms that the Italian economy is more sensitive to further tightening in the credit markets. This will have a direct impact on the country’s businesses, and to a further extent than in other countries in the eurozone.
Now, Italy is not equal to the development in the entire eurozone, but we can’t see any positive counterbalance elsewhere in the Pan-European economic zone; Italy is, after all, the eurozone’s third largest economy.
The biggest threat we consider to be increasing is further credit downgrades of the Italian economy. The country is already very close to “junk” status, and it will be a downturn for the eurozone if that situation materialises, though it will take some time before it materialises.
Prolonged cold winds
Another example from the IMF’s list of challenges is that so many special and temporary taxes have now been introduced that neither citizens nor companies can navigate them. Thus, the security of economic planning is lost.
If we go back to the aid packages of the Covid-19 era, it was the time when the largest economic rescue package in the EU’s history was put together, with the name “NextGenerationEU”. The size was over EUR 800 billion in support and credits, of which approximately EUR 200 billion is intended for Italy, and one might wonder if that amount of money could help out a bit.
Yes it would, but one condition was the funds must not go to simply patching holes in the road; rather, it must move the country forward. So far, EUR 65 to 70 billion have been paid out, but the IMF points out that the Bank of Italy has calculated the prospects for disbursing the rest of the funds.
Due to the requirements for the applications, which are apparently time-consuming to process at the municipal level, the principal requires that 375,000 people must be hired to handle the numerous applications. The current assessment is that the deadline for the payments out of the rescue fund in August 2026 cannot be met, though it can hardly be described as a Covid-19 aid in that time either.
Italy’s situation is outspoken, but we consider the eurozone as clearly the weakest link in the global growth chain, which may become very evident in the next 18 months. In our view, reality becomes clearer each passing day that the cool economic wind blows longer than expected. It also means that a successful investor will need to spend extra time finding a place under the sunshine, and opportunities are still there, after all, though increasingly outside the Eurozone.
