Italy has good news for Europe

Whisper it quietly, but the worst may be over for the euro zone economy. After months of gloom, and with analysts wondering whether Europe was heading for a recession, the industrial sector shows signs of stabilising.
The slight revival will please the European Central Bank (ECB), which is considering whether to double down on its monetary easing as it struggles to meet its inflation target. But it would also be good news for Italy’s populist leaders, who have come under severe criticism for their economic policies. After a terrible end to 2018, country’s industrial sector is bouncing back and is now among the star performances in the monetary union.
Official statistics showed industrial production in euro zone fell by just 0.2% in February from previous month, beating expectations of a 0.5% decline. Even better, the increase between January and December was revised up to 1.9% from 1.4%. As a result, even if industrial production were to be flat in March, it would still grow by 0.7% on a quarterly basis.
The industrial sector only produces a fifth of the euro zone output. But European policy makers have been especially worried about its wobbles. In a speech last month, Mario Draghi, ECB president, had noted the divergence between a resilient service sector, which is largely driven by domestic demand, and weakening manufacturing, which is more reliant on the vagaries of global trade. The fear was that a continued industrial slowdown would limit future employment and wage gains, which in turn would hit consumption and the services sector hard.
An industrial revival would take the ECB out of an embarrassing situation. The central bank interrupted its net asset purchases at the end of 2018, on a path of gradual removal of its monetary stimulus. In March, Draghi had to change course, as he pushed back the date of the first rate hike to 2020 and unveiled a new scheme of cheap loans for banks. Policy makers are taking time to assess how severe the slowdown really is, but some investors are now wondering whether the next ECB move could be a fresh rate cut as opposed to a hike.
Since the start of 2019, Italy’s industrial sector has been one of the fastest-growing in the monetary union, however. Industrial production rose by 0.8% in February from a month earlier, after a revised 1.9% jump in January – the largest bimonthly rise since the end of 2017. Even if industrial output stayed flat in March, this would still amount to a 1.4% jump quarterly.
Of course, it is still too early to tell whether Europe truly turned the corner. The good data of past two months in euro zone and Italy could simply be a short-lived rebound, as companies rebuild stockpiles they ran down at end of year. In the currency union, the renewed risk of a trade war with US could dampen output and confidence once again. In Italy, higher borrowing costs are bound to continue to weigh on economic activity.
But the outlook for the monetary union remains well open. For central bankers and anti-establishment forces, the good news may be yet to come.

—Bloomberg

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times