Euro Macro: Central bank of Italy signals slower growth and high uncertainty – Banca d’Italia published its Economic Bulletin last Friday. According to Italy’s central bank, the available cyclical indicators suggested that GDP growth slowed down to 0.1% qoq in Q3, down from 0.2% in Q2, mainly reflecting ongoing weakness in the industrial sector. This slowdown in growth means that the risks surrounding Italy’s government finances have increased, as the government’s targets for the budget balance and debt ratio largely depend on a very favourable economic scenario.
In its Economic Bulletin Banca d’Italia does not comment directly on the government’s 2019 Budget, but it regularly refers to the negative consequences of the tensions that have been building up in financial markets since the new government took office and presented its expansionary fiscal policy plans. For instance, it mentions that purchases of Italian portfolio securities by foreign investors in the early part of the year were followed by net sales between May and August. Indeed, during the period January-April foreign investors purchased EUR 42bn of Italy’s government bonds and subsequently sold EUR 67bn during May-August. The decline in holdings of Italian government debt by foreign investors went hand in hand with extra purchases by Italian banks, which raised their holdings of government debt by almost EUR 47bn during May-July. Also, the central bank’s report mentions that tensions in financial markets were reflected in the risk premium on bank bonds and a decline in bank share prices, and that the interest rate on new bank loans to companies rose slightly. On top of that, the Banca d’Italia’s quarterly Survey on Inflation and Growth Expectations (also published on 15 October) reveals that Italian companies have scaled down their investment plans since the start of the year, while their assessment of the conditions for investment has deteriorated. This implies that the weakness in economic growth could well last beyond Q3. Indeed, we expect growth of a little under 1% in 2019 – with risks to the downside – which is well below the government’s optimistic assumption of 1.5%. (Aline Schuiling)
US Politics: No imminent tax cut, but a potential election pledge – President Trump sowed confusion over the weekend with a claim that the Republican Party would enact ‘a major tax cut for middle income people’ before the midterm elections on 6 November. While the media has struggled to confirm what Trump was referring to with this claim, it is impossible for Congress to pass any tax cut at this stage given it is already in recess ahead of the elections. What is possible is that the President turns this claim into a pledge to implement such tax cuts should Republicans retain control of the House in the elections. A Republican win looks unlikely given the latest opinion polling, but by no means impossible. Indeed, the Party’s popularity is closely linked to the President’s approval ratings, which have recovered to -7.8 points from a low of -13 in September, as the controversy over ‘hush money’ paid to Stormy Daniels has receded from the headlines, and positive newsflow on the US economy has continued. The President’s recent success at negotiating an updated trade agreement with Canada and Mexico has also likely helped, with Republicans now leading Democrats on trade issues in a recent Wall Street Journal/NBC survey by 17 points, up from 8 points in an August survey. Further tax cuts in the event of a Republican midterms win is a possibility we have highlighted in our preview for the elections, and could have significant implications for the US economy over the coming years. (Bill Diviney)