The sentiment indicators of The European House – Ambrosetti Club regarding the current economic situation and prospects for the job market indicate a slight deterioration, and confirm that the Italian economy is not actually able to accelerate or, at least, keep up with the other economies in the Eurozone.
As I said in a previous article in Il Sole 24 Ore: Italy is still on a “scooter”, not a full-fledged motorcycle!.
For the last three years, we have been experiencing slow growth. During that time, some positive economic statistics were released which gave rise to hopes that it would accelerate. But with the release of new figures, this trend was not substantiated and the results are well-known to all: 2017 will be another low-growth year. We have seen it happen at least three times in the last three years: at the beginning of 2015, over the end of 2015 and beginning of 2016, and the end of 2016 and beginning of 2017.
Each of these times, it seemed that the Italian economy might finally experience a turn-around. Unfortunately, the positive signs failed to concretize and growth remained weak. Especially in comparison with that in the major Eurozone economies. The most recent forecasts from the European Commission for Italy indicate a growth rate of 1%, 1.4% for France, 1.6% for Germany, 2.1% for The Netherlands and 2.8% for Spain.
The sentiment indicators of The European House - Ambrosetti Club regarding the current economic situation and prospects for the job market indicate a slight deterioration, and confirm that the Italian economy is not actually able to accelerate or, at least, keep up with the other economies in the Eurozone.
On the other hand, the contextual conditions remain exceptionally positive and it would be right to expect more. European monetary policy remains strongly expansive. The ECB acquires 15 billion euros worth of Eurozone government securities each week and has reached a credit balance of 4.25 trillion euros, which is equal to 40% of the entire Eurozone GDP. Even the US Federal Reserve pales in comparison. The policy of quantitative easing in the US has brought the credit balance of the Fed to a level of 23.5% of GDP, half that of the ECB. Interest rates remain at their all-time low, thus lightening government budgets such as Italy’s with large public debt. The efforts of the ECB allows Italy to place its government securities at negative interest rates for up to four years. The price of oil remains low, between $45 and $50 per barrel, which under normal conditions would be the equivalent of a minor expansionary budgetary maneuver. World GDP is accelerating, with growth forecasts of over 3% which, if confirmed, would be the highest since 2010.
Although present, factors of instability and uncertainty are diminishing. Following the Brexit vote and the results of the US elections which could have been the fuse for triggering a process of disintegration in Europe, recent elections in a number of key nations have marked a lull in movements against the euro and European unity. On the contrary, over the last year, the victories of Rajoy in Spain, Rutte in The Netherlands, Van Der Bellen in Austria and, recently, Macron in France, have laid the bases for greater integration.
The sentiment of the Italian business community regarding business trends remains generally positive, but among the top management of companies operating in Italy, no strong, clear signal of acceleration of economic activity emerges.
Our indicators are developed on the basis of the results of a survey carried out with over 350 businessmen, CEOs and top management of leading Italian and multinational companies operating in Italy. On a quarterly basis, we glean information regarding the view of the Italian business community about business in its respective sectors from a 360° perspective, on planned investment, sales trends and changes affecting the workforce.
Values above zero indicate that sentiment is positive with the forecast of an expansion in economic activity, whereas values below zero indicate that sentiment is negative and forecasts a contraction in economic activity.
In June, the sentiment indicator regarding the current economic situation was at 28.3 points, slightly below the 30.9 in March and the 31.7 in December, which marked an all-time high. The values remain positive, but with a slightly diminishing trend. Businessmen and managers in our business community confirm, therefore, an economic picture of modest growth which continues at an overall low level.
In terms of employment, sentiment continues to worsen, at a level of 4.7, just slightly above zero. This is down from the 9 points in the March survey and the 12.7 points in December. We have nearly returned to the lowest levels of the last two years.
As was the case above, this value remains positive, although at a very low level. Confirming the results of our indicator last year which foresaw a slight growth in the job market, unemployment decreased this month to 11.1%, from 11.6% in June 2016.
In terms of investment, on the other hand, sentiment is much more positive. The indicator marked a level of 29.3, compared with 25.8 in March, not far removed from the maximum level in December 2016. This figure is important, given the fact that, in the medium-term, investment translates into increased productivity and competitiveness.
I was very struck by the recent report published by ISTAT regarding the redistribution of wealth in Italy. What emerges is a situation that we should all reflect on seriously, and quickly. Government intervention into incomes that is comprised of taxes, deductions and donations drastically reduces the risk of poverty in elderly families, while young couples and adults with children under 18, following government intervention, are more vulnerable to the risk of poverty. Specifically, the public redistribution system increases the risk of poverty for young adults between 15 and 24 years of age (from 19.7 before intervention to 25.3% following intervention) and for those between the ages of 25 and 34 (from 17.9% to 20.2%). I do not believe that such a situation is sustainable over the long-term.
Within this context, during the meetings held regularly with our community of businessmen and CEO’s, what emerges forcefully is that for full economic recovery, Italy must not only involve the younger generation in the workforce, but also take on two other key elements: reduce the gap between the north and south of the country, and extend growth to all economic sectors.
There can be no national recovery if Italy’s south continues to have a per capita GDP that is less than half that of the Lombardy region. The Italian economy is based on consumption that represents over 60% of GDP. If half the country lacks purchasing power, the average growth rate will always be lower than that of other European countries. In exactly the same way, there can be no national recovery based solely on exports and the manufacturing sector whose 16.5% share of GDP is important, but still only a minority contribution. Growth must be extended to other sectors that have been hit especially by the crisis. For example, since 2008, construction alone has lost nearly 550,000 jobs, almost 25% of the sector’s entire workforce. A new sense of drive must be found in all economic sectors.
Managing Partner and Chief Executive Officer,
The European House - Ambrosetti