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Euro Politics: New PM Conte backs costly coalition promises – The new Prime Minister of Italy Giuseppe Conte promised a ‘wind of change’ in his first speech on Tuesday. Addressing the Senate he re-asserted key fiscal pledges in his populist government’s coalition agreement.
He promised to implement – among others – the two signature fiscal policy measures of the Five Star Movement and Lega. These are the flat tax of two tariffs (15% and 20%) and a guaranteed income of EUR 780bn per month. The total costs of these two measures are estimated to be around EUR 70bn, which is equal to around 4% of GDP.
If these measures were to be implemented, the government debt ratio would mount to around 180% GDP in 2030 (up from around 132% in 2017). The policies would need to be significantly watered down or major offsetting austerity measures would be needed in order to see a more benign scenario for the government debt ratio.
As such, it is no surprise that Italian government bond yields jumped on Tuesday, as some of these fiscal risks were priced in. If these fiscal risks were to materialise, Italian assets would see significant more downside.
In a sign that Prime Minister Conte would not easily yield to pressure from Europe to stick to the fiscal rules, he talked up Italy’s ‘negotiating power’. Indeed, the Italian government would not lay down as easily as the government of Greece has over the years, when faced with a confrontation with Brussels and Berlin. (Nick Kounis & Aline Schuiling)
Euro Macro: Eurozone consumption growing solidly – The volume of retail sales in the eurozone rose by 0.1% mom in April. Although this was below the consensus forecast of 0.5%, the recent trend in retail sales has been favourable.
For instance, the March growth figure was revised higher (to 0.4% from 0.1%), while the rise in April was the third consecutive monthly increase, which is a solid performance considering that the series tends to be notoriously volatile.
The details of the retail sales report shows that sales excluding food and energy expanded sharply in April (+1.7% mom), but that sales of food and automotive fuel shrank. The decline in food and energy consumption is probably due to the rise in oil prices and in the prices of processed and unprocessed food in recent months.
We expect these price rises to have only a temporary downward impact on the volume of retail sales. More fundamentally, retail sales and private consumption more generally currently are being supported by robust employment growth and positive wealth effects from a recovery in housing markets throughout the eurozone.
Moreover, the low level of interest rates is not only supporting demand for mortgage loans, but also for consumer credit. Looking forward, we expect private consumption to continue to grow solidly throughout this year, as the favourable fundamentals are expected to remain in place, while the impact of price rises will peter out. (Aline Schuiling)
