Italy is back in recession for the third time in a decade. This one may be particularly hard as Italian Manufacturing Shrinks at Worst Rate in Six Years.

• Italy’s purchasing managers’ index (PMI), a measure of business conditions in the sector, sank to 47.8 in January – a sharp drop from 49.2 in December, and below the 50 neutral mark. This meant the sector has been shrinking for fourth consecutive months.
• Jobs in industry fell for the first time in four years in January as new orders dropped sharply and output was down.
• New orders fell for the sixth consecutive month, suggesting that output in subsequent months may be lower.
• The slowing Italian sector dragged on the eurozone overall, which was close to standing still. The overall PMI was 50.5, down from December’s reading of 51.4, increasing the chances that it is now in recession.
• Germany also dragged on overall eurozone figures, as its powerful manufacturing sector contracted for the first time in four years. Again, this is likely to worsen further as new orders fell as the fastest rate in more than six years.

Eurozone Manufacturing

Those are all considered “soft” data points as the PMI is a diffusion index. However, the soft data matches the hard data as the latter shows Italy suffered second quarter of GDP contraction.

With that, lets dive into the IHS Markit Eurozone Manufacturing PMI for more details.

Key Findings

• Final Eurozone Manufacturing PMI at 50.5 in January (Flash: 50.5, December Final: 51.4)
• Output up marginally, but sharpest fall in new work recorded since April 2013
• Growth sustained via reduction in backlogs and fastest accumulation of stocks in survey history

The headline index has now fallen for six consecutive months and stood in January at its lowest level since November 2014.

Chris Williamson, Chief Business Economist at IHS Markit said: “Worryingly, weaker than anticipated sales mean warehouses are filling up with unsold stock at a rate not previously recorded over the two decades of prior survey history, suggesting firms will need to cut operating capacity in coming months unless demand revives, boding ill for future production growth.”

Italy PMI: Bright Spot – Falling Prices

Let’s take a quick look at Italy’s PMI.

Amritpal Virdee, Economist at IHS Markit, which compiles the Italy Manufacturing PMI survey, commented:

“January’s PMI data signalled another deterioration in Italian manufacturing conditions, with firms struggling in the face of a sixth consecutive monthly fall in new business. Decreases in output, purchasing activity and employment (the first in over four years) were recorded, marking a weak start to 2019.”

“There was a bright spot, though, with a significant weakening in input price inflation which enabled manufacturers to lower selling prices for the first time in 27 months in an effort to boost sales.”

Hmm. I wonder what Mario Draghi thinks about that bright spot.

Germany PMI: Bright Spot – Falling Prices

Rounding out our Eurozone trio, please note that a sharp fall in new orders caused Germany’s PMI to fall into contraction territory in January.

Key Findings

• Steepest fall in new orders for six years
• Uncertainty, trade friction and autos weakness hit demand
• Purchase price inflation pulls back to 27-month low

Phil Smith, Principal Economist at IHS Markit, which compiles the Germany Manufacturing PMI survey, commented:

“Thanks to a strong rise in consumer goods output, overall production remained just inside growth territory in January, but there are growing risks to the near-term outlook. Stocks of finished goods rose the joint-most on record, backorders continued to be depleted, and firms’ expectations towards future output showed no appreciable improvement from last October’s six-year low. The downturn is feeding through to supply chains, with lead-times on purchased items edging closer to stabilisation in January as manufacturers scaled back their demand for inputs. Purchase price inflation has also come down a lot in recent months, offering some respite to any struggling manufacturers.”

Too Big to Bail, Too Big to Jail

Italy is in recession with very troubled banks. I commented yesterday, Too Big to Bail, Too Big to Jail.

Germany and and France are on the cusp and Brexit is on the horizon.

Brexit Chicken

Germany will get crushed in a hard, WTO-Brexit because the UK is Germany’s biggest export partner.

UK Prime minister Theresa May ought to wake up and take advantage.

In a game of “Brexit Chicken”, the UK faces this choice: 1-2 Years of Pain Now vs Permanent Idiocy.

Mike “Mish” Shedlock