Goodbye European recovery, we hardly knew you.
It must have come as a huge shock to all hypnotized lemmings aka "sophisticated investors" who have been following the manipulated, artificial yields in the Italian 10Y relentlessly declining and thus suggesting at least some economic stability, when an hour ago instead of reporting a 0.1% increase for its Q2 GDP as widely expected, Italy "unexpectedly" reported a sequential contraction of -0.2% down from a -0.1% drop in Q1, and officially the start of yet another, its third since Lehman, recession. Then again, considering Italy's youth unemployment of over 40% just hit a record high, we use the term "unexpectedly" rather loosely.
This is how Italy's real GDP just dropped to the lowest level since 2000.
But... that means all those PMI and confidence surveys were.... absolute horseshit!?
Italian gross domestic product unexpectedly dropped in the second quarter, showing the economy is in recession. Gross domestic product fell 0.2 percent from the previous three months, when it declined 0.1 percent, the national statistics institute Istat said in a preliminary report in Rome today. That compares with the median forecast of a 0.1 percent expansion in a Bloomberg survey of 22 economists. From a year earlier, output shrank 0.3 percent.
With Italian youth unemployment above 40 percent and sovereign debt of about 2 trillion euros ($2.7 trillion), Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy. Lower-than-expected growth may undermine his plans to bring the country’s deficit-to-GDP ratio to 2.6 percent this year and start reducing Europe’s second-biggest debt.
Renzi has acknowledged that annual GDP growth will probably fall well below the Treasury’s 0.8 percent forecast, while the government’s debt reduction plans also seem to be yielding disappointing results, Wolfango Piccoli, managing director at Teneo Intelligence in London, wrote in a research note this week.
Italian GDP declined by 0.2%qoq in Q2, a second consecutive quarter of contracting GDP (Q1 GDP growth was -0.1%qoq). Today's outturn was weaker than our and the consensus expectation of a modest increase (Cons: +0.1%qoq, GS: +0.3%qoq). Also released this morning was Italian IP for June, printing a robust 0.9%mom increase following the weak May outturn.
1. Today's GDP release is preliminary and does not include an expenditure or output breakdown (due on August 29). According to the statistical office, output was down for both industry and services.
2. The level of Italian output remains depressed at around 9% below its peak (and close to the levels seen in 2000, Chart 1).
3. Today's data are at odds with improving business sentiment. Business sentiment has generally improved since 2013, with both the Composite PMI and the Istat business survey rising steadily towards, or above, the long-term averages (Chart 2). For example, the Italian Composite PMI rose sharply from a level of around 44 early last year to around 53 two quarters later. The Italian PMI eased in Q4 (to a still robust average of 50.0) before rising to 51.9 in Q1 and 53.1 in Q2.
But the punchline, coming moments after the report, was when Goldman again repeatedly to dump European peripheral bonds with the following caveat:
We have also decided to drop our relative preference for Italy, our top pick in peripheral space in 2014H1
That will be $29.95. In soft dollars.
Finally, confirming that Europe's mythical, and just as manipulated "recovery" is also over, was German factory orders data for June, which crashed -3.2%, on expectations of a bounce from -1.6% to 0.9%. This promptly sent German 2 Year Bund rates negative and the ECB scrambling to figure out how to extend and pretend the myth that things are ok "whatever it takes."