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Italy’s Industrial Engine Sputters on German Economic Malaise

Dan Liefgreen
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Italy’s Industrial Engine Sputters on German Economic Malaise

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The tremors from Germany’s downturn are reverberating in Italy -- particularly in the country’s industrial heartland.

Companies big and small in the prosperous northern regions have been hit by declining sales as Europe’s largest economy buckles under a manufacturing slump. That’s a problem for Italy’s government, desperate to boost its own economic growth to help it get control of Europe’s largest public debt load.

Germany is Italy’s top export destination, with 58 billion euros ($64 billion) of goods sold in 2018, mostly industrial products, from auto components to refrigeration systems to chemicals.

The impact is tightly concentrated. Three-quarters of sales to Germany are produced in five north-central regions: Lombardy, whose capital is Milan; Piedmont; Tuscany; Emilia Romagna and Veneto, the region surrounding Venice.

“Compared with the rest of Italy, the north is extremely exposed to the trend of exports, and what’s happening at the global level,” said Giuseppe Pasini, president of the Industrial Association of Brescia, near Milan. “It’s not only the German problem, but also uncertainty about the tariff war between the U.S. and China, and the Brexit issue.”

A number of car-components makers are clustered throughout Lombardy and Piedmont, whose capital Turin is birthplace of Agnelli family-founded automaker Fiat.

Fonderia di Torbole, a disc brake maker in Brescia, is among those with an interest in a strong Germany, as it accounts for about a third of the group’s 160 million euros of annual sales. Clients include German car giant Volkswagen AG as well as Toyota Motor Corp. and Hyundai Motor Co.

“Fortunately the impact has been limited for us,” since the company’s components are mainly for non-diesel vehicles, said Chief Executive Enrico Frigerio, whose grandfather started the foundry in 1923. Still, he’s halted Saturday production shifts in the wake of declining sales.

“I’m hoping we can see a recovery in the first half of 2020,” Frigerio said.

That may be optimistic. Germany’s surprise third-quarter expansion was only 0.1%, and it may not improve this quarter. While there have been some better signs recently, expansion still isn’t forecast to get above 1% either this year or next.

Jamie Rush, chief European economist for Bloomberg Economics in London, said a far bigger issue for Italy is uncertainty related to U.S.-China trade tensions. That’s also a factor for the rest of the euro-area, where average 2019 growth is set to be the weakest in six years.

“The impact of Italy’s supply chain link with Germany is a bit exaggerated,” Rush said.

Adapting to Change

According to analysis by Italian bank Intesa Sanpaolo, 91 of Italy’s 150 industrial districts are seeing declining sales to Germany. And it’s not just the car-parts sector getting hit, with exports of chemical, rubber, textile and food products also down.

Still, companies are adapting by building markets in other countries, said Fabrizio Guelpa, head of industry research for Intesa.

“For Italy, the German slowdown is certainly a problem, but it shouldn’t be overplayed,” he said.

For now, companies are working through the hard times after a long period of solid demand. Brembo SpA, the world’s top disc brake maker, saw a 14% drop in sales to Germany in the first nine months of this year. That compares with a 2.5% decline in Italian sales and 5.5% growth in France.

“There have been delays in the introduction of new car models, which has hurt sales,” said Matteo Tiraboschi, Brembo’s executive vice chairman. “But we have to remember that the German downturn came after 10 years of growth.”

--With assistance from Alessandro Speciale, Giovanni Salzano, Maeva Cousin (Economist) and Fergal O'Brien.

To contact the reporter on this story: Dan Liefgreen in Milan at dliefgreen@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Jerrold Colten, Guy Collins

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