November 8, 2017 / 11:24 AM / a year ago

Commentary: Long the laggards, Italy and France drive "la Euroboom"

LONDON (Reuters) - Germany and Spain have been the drivers of euro zone growth over the last couple of years, but it’s France and Italy steering the “Euroboom” into 2018.

French President Emmanuel Macron and Italian Prime Minister Paolo Gentiloni attend a news conference during their Franco-Italian summit in Lyon, France, September 27, 2017. REUTERS/Robert Pratta

Given their history, particularly Italy’s, there are doubts over how long this will last. Calls for “structural” reforms and labour market liberalisation are as shrill as ever and progress on those glacial. But signs are encouraging.

Fred Ducrozet at Pictet Asset Management notes that the latest leg of this “robust and broad-based” recovery has been increasingly driven by laggard countries “catching up with the rest of the pack.”

He’s crunched the numbers and unsurprisingly finds that Italy is punching well below its weight.

Based on end-2016 figures, Italy accounts for 15.5 percent of total euro zone economic output. But it has accounted for only 4.2 percent of cumulative growth since the euro’s inception in 1999, almost four times lower than its weighting.

Yet since Q2 2013, Italy’s cumulative contribution to overall euro zone growth stands at 7.5 percent, according to Ducrozet. If you start at Q1 last year, that rises to 9.6 percent.

Based on end-2016 figures, France’s share of the euro zone economy is 20.6 percent. Since 1999 France’s contribution to euro zone growth has been almost exactly the same as its weighting, at 21.1 percent.

That falls sharply to 13.0 percent when using Q2 2013 as the starting point, reflecting just how hard France’s economy was hit by the 2008 global financial and 2011-12 euro zone debt crises. But since Q1 last year, that has risen to 14.2 percent.

Ducrozet’s analysis shows that both countries are moving in the right direction, albeit slowly. Even though they’re both coming up from a low base, they’re narrowing the gap between actual and potential growth.

Erik Nielsen at Unicredit notes that, contrary to perceived wisdom, Italy’s low trend growth rate of 1-1.5 percent is sufficient to keep the country comfortably servicing its large debt load of around 130 percent of GDP.



Euro zone investments have turned in one of their best years since the single currency was born in 1999, confounding many who had bet on the bloc to be the disaster play of 2017.

The most recent figures suggest the economic upswing is continuing, even accelerating. Italy’s much maligned manufacturing sector expanded at its fastest pace in over six and a half years in October, and the biggest upward revision of all euro zone purchasing managers data was to the French index.

Italy’s got a long way to go. It is by far the worst-performing economy in the G7 industrialized nations, being the only one yet to return to its pre-crisis size - a lost decade and counting.

But annual growth in the second quarter was 1.5 percent, the highest in six years, and the Organization for Economic Cooperation and Development recently upped its 2017 and 2018 outlook for Italy more than any other G7 country.

The OECD also raised its 2017 growth forecast for France by a chunky 0.4 percentage points, to 1.7 percent.

“French GDP growth has shifted up a gear,” wrote Barclays economists in a note titled “Rosy Outlook Continues To Unfold”. They predict the French economy to grow at an above-consensus 1.9 percent next year.

The financial and market numbers are also beginning to look up, even though investors expect the European Central Bank to close off the stimulus taps some time next year.

France’s two big banks BNP Paribas and Societe Generale have emerged as among the most consistently profitable European investment banks over the last couple of years, particularly BNP Paribas.

The value of bad loans on Italian banks’ books has fallen to its lowest in over three years, to 172.85 billion euros. That’s still well above the pre-crisis average of around 50 billion euros, but is retreating from the steady level around 200 billion euros during the two years mid 2015-mid 2017.

These glimmers of hope in the Italian banking system - and they are only glimmers - have helped fuel an impressive rebound in the country’s stock market. The Milan bourse is up 20 percent this year, outperforming France, Germany, Britain’s FTSE 100 and Wall Street and on course for its best year since 1998.

And last month, Standard & Poor’s unexpectedly upgraded Italy’s sovereign credit rating by one notch to BBB, the ratings agency’s first upgrade for Italy in at least three decades.

Writing and reporting by Jamie McGeever; Editing by Peter Graff

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