Editor's Note: Below is a brief excerpt from this week's edition of Market Edges, a weekly newsletter contextualizing key economic data within big picture macro trends. Click here to get a free month.
The International Monetary Fund released its world economic growth projections last week, painting a largely rosy picture of the world. The report raised its estimate for global growth 10 basis points from its July forecast to 3.6%. The developed world economies – from the U.S. to countries in the Eurozone – all got a boost.
In the previous edition of Market Edges, we introduced our 4Q Macro Theme “Global Growth #Divergences.” This theme overtly questions the validity of Wall Street’s “synchronized global recovery” narrative. We’re bullish on the U.S. but abroad, in Europe and China, we see slowing growth.
The Italian economic outlook looks particularly awful.
According to our GIP model, growth in the country appears to have peaked and will likely trend lower through early 2018. That means Quad 4 (Growth slowing, inflation slowing) for Italy, a setup which has historically been very bad for equity markets.
Italy’s problems are both cyclical and secular in nature, a powerful combo that doesn’t bode well for an economy where the banking sector’s non-performing loans exceed 15 percent of all loans and 20 per cent of gross domestic product.
On the cyclical side, Italy’s household consumption has stalled as you can see on the left hand side of the chart below. The headwinds continue to grow. Most recently, Italian Retail Sales were down -0.5% on a year-over-year basis (versus 0.0% in the month prior). This is really important. Consumption contributes about 60% to Italian GDP.
Meanwhile, on the secular side, Italy’s demographic trends look awful.
What the chart below shows (on right hand side) is the slowing in Italy’s peak consumer age bracket, the number of 35-54 year olds. At the same time, the country’s “Old-Age Dependency ratio” (the percentage of 65+ year olds over working age Italians) is swelling. In short, policymakers really don't want their country to be in the bottom right hand side of this chart, precisely where Italy is today. The Italian populace is aging and there simply aren’t enough working age Italians to make up for the resulting consumption shortfall.
These slowing demographic trends combined with a cyclical economic contraction suggest a precarius setup for Italian equities.
