Italian Election Update

The general election in Italy is now about a month away as it will be held on March 4th. The chart below shows the latest trends in the polling. As you can see, the left leaning establishment People’s Democratic party has been cratering in the polls. This shows the high level of voter unrest even though the European economy is in a cyclical upswing. This is just like how President Trump won the U.S. presidency based on economic unrest in the Midwest despite solid overall economic conditions. The right wing 5 Star Movement has maintained its level of support consistently. Flat polling has allowed it to gain the lead. The Lega Nord has been falling modestly and the Forza Italia party has been gaining ground steadily. Even with this huge wave election coming, investors aren’t worried. This election, which could have been a risk to American markets, has barley even effected the Italian bond market even as the ECB has pulled back on bond purchases this year. Year to date, the Italian 10 year bond yield is almost flat as it’s up 0.64%.

The chart below shows the Italian unemployment rate. As you can see, the seasonally adjusted rate fell to 10.8% in December 2017 which was the lowest jobless rate since August 2012. The cycle high of 13% in November 2014 was also the all-time high. Italian bond investors might be looking at the Italian economy and hoping it will follow in Greece’s footsteps. Greek unemployment fell from 27.9% in July 2013 to 20.7% in October 2017. The problem for Italy is that there are structural issues in the south as the migrants coming to Sicily aren’t being properly integrated into the economy. The discomfort in southern Italy is like the Midwestern discomfort in the 2016 U.S. election. That’s why we’re seeing the Democrats in Italy collapse in the polls. While I think the Italian economy is rebounding, I heed the election warning which shows all is not well. People re-elect the incumbent party if the economy is doing well for them.

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