Articles
9 October 2020

Italy: Strong industrial production rebound continued unabated in August

Even allowing for holiday-related volatility, supply side developments imply a record-high GDP rebound in 3Q20. However, with infections getting worse, risks to 4Q20 GDP growth are clearly increasing

Fourth consecutive positive reading, clearly beating expectations

The strong rebound in Italian industrial production continued in August, further supporting expectations of a record high GDP expansion in 3Q20.

According to Istat’s release, seasonally-adjusted production was up 7.7% month-on-month in August (+7.0% MoM in July), the fourth consecutive positive reading and clearly beating expectations. The working day adjusted measure was down 0.3% year-on-year (-8.3% in July) showing that the gap with 2019 is closing faster than expected.

A quick look at the big aggregate breakdown shows that the strong performance was widespread, led by consumer goods (+6.6% MoM under a marked durables drive), with capital goods (4.3% MoM), intermediate goods (+4% MoM) and energy (+3.5% MoM) following closely behind.

Massive statistical carryover for 3Q20 industrial production makes supply side a strong GDP driver, with a caveat

Today’s data provides further evidence that the rebound following the lockdowns was a very strong one. The statistical carryover of August data on 3Q20 production is massive. Even assuming a flat reading in September, 3Q20 industrial production would be up a whopping 31% on 2Q20. However, some caution in the interpretation of the August release is warranted, in our view. Typically, August data is subject to potential seasonal adjustment issues due to the distribution of summer holidays; this time round, distortions could have been amplified. The forced closures during lockdown might have induced more businesses to keep their plants open, generating a boost to production that has not been filtered by seasonal adjustment procedures. Still, even taking into account a possible setback in September, there is little doubt that the supply side will be a key driver of the record rebound in 3Q20 GDP.

Retail sales data has also been strong

Demand side evidence has also been conducive to strong growth. In August, retail sales were up 11.2% MoM in volume terms, led by non-food items. Even though the August reading has likely been distorted by the delayed timing of sales (in July the volume of sales contracted by 5.4% MoM) which has also affected inflation data, the three-month measure confirms that the combination of labour market support measures and the lifting of restrictive measures worked its magic, at least as far as goods were concerned.

Uncertainty on 4Q20 increasing due to epidemic

Unfortunately, what we are seeing is a picture of the rear-view mirror. Uncertainty over 4Q20 is growing by the day, together with worsening infection data. For the time being, the government reaction has been limited to tighter rules on the use of face masks and on rules for public gatherings, and rare city-level temporary lockdowns are being envisaged by a few municipalities. Pressure on hospitals is increasing, but remains at very low levels compared to the worst days of the first wave, with the exception of Southern regions, which had been little affected by contagion in March and April. Looking forward, the Italian government seems determined to avoid a new nationwide lockdown, and we are currently assuming that this will be the case. However, more widespread local restrictions and the impact of Covid on Italy's main trading partners would clearly take a higher toll on both domestic demand and Italian exports over 4Q20.

All in all, recent hard data points to a likely positive surprise on 3Q20 GDP growth estimates, but developments on the epidemic front and their potential negative impact on both domestic and foreign demand add downside risks to the fourth quarter. These two quarters might cancel each other out, and we tentatively confirm our forecast for an average 10% GDP contraction over the whole of 2020.

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