Overview

AMBROSETTI CLUB ECONOMIC INDICATOR

Has the Italian freight car become decoupled (permanently) from the European locomotive?

From the preliminary estimates for the first three quarters of the year, 2019 would seem headed towards 0 growth.

Has the Italian freight car become decoupled (permanently) from the European locomotive?

Although still positive overall, economic growth is slowing across the globe. The economic cycle currently underway is one of the longest in history. The group of OECD countries has grown uninterruptedly for 27 quarters and only 13 more are required for the current growth phase to become the second longest of all time.

Nonetheless, the International Monetary Fund has lowered once again its forecast for the worldwide growth rate in 2019. In April, it was +3.9, revised to +3.7 in October and further lowered to +3.5 in the most recent forecast in January. Similar signs of slowdown were seen in the Eurozone. In its Fall release, the European Commission forecast a +1.9-growth level in 2019, later lowered to +1.3 in the Winter release. Germany is stagnant (quarterly growth at -0.2 for the third quarter 2018 and 0 in the fourth) and France is in difficulty (growth at +0.3 in both the third and fourth quarters). The only country that seems to have avoided the sudden slow-down is Spain, which in 2018 grew by 2.6%.

As I wrote in my previous article in this publication, “if the world economy slows down, Italy stops”, and this seems to be what is happening. The 2019 growth forecasts issued by various international organizations for Italy range from +0.6 (International Monetary Fund) to -0.2% (OECD), the only country with a negative growth outlook. If GDP growth in 2019 proves to be in line with the OECD forecasts, even with a deficit equal to 2% of GDP, the debt/GDP ratio would rise to 134.3%. This macroeconomic situation would thus require corrective action totaling over €30 billion to stabilize the debt/GDP ratio at the 2018 level, including for the current year.

The Ambrosetti Club Economic Indicator is a set of indicators assembled on the basis of ad hoc surveys carried out every three months among the business community by The European House – Ambrosetti (the no. 1 private think tank in Italy and one of the top 10 in Europe). It contacts over 350 entrepreneurs, CEOs and other leading executives representing the top management of leading Italian companies and multinationals operating in Italy and provides, six months in advance, a forecast of the trend in GDP with a margin of error of 0.1%.

From the preliminary estimates for the first three quarters of the year, 2019 would seem headed towards 0 growth.

In fact, the Ambrosetti Club Economic Indicator presents a climate of lack of trust. The current business environment indicator shows a worsening for the fourth consecutive quarter and, for the first time since the creation of the indicator, is negative, a reflection of pessimistic sentiment. Please note that the indicator operates on a scale from -100 (totally negative expectations) to +100 (totally positive expectations). The Indicator also registers the largest drop from one quarter to the next, with a negative variation of 21.8 points. The Indicator has been worsening steadily since December 2017, with an acceleration in the decrease between the second and third quarters of 2018.

Assessment of the current business environment – March 2019: -6.8

Values above zero indicate expansion/positive sentiment, values below zero indicate contraction/negative sentiment

 

The statistics regarding industrial production are clear: the short-term monthly variation was negative in November (-3.4%) and December (-1.4%). The increase in January (+1.7%) did not mark a turning point, but only a “technical” rise given that in February industrial production was once again negative (-0.5%), a reflection of problems in the automotive sector.

The 6-month business forecast, negative for the first time since the creation of the Indicator, also mirrors this lack of confidence. However, the actual variation is lower than that seen for the Indicator regarding the current business environment, the result of the drop in expectations already experienced in the last quarter of 2018.

6-month forecast of the business environment – March 2019: -6.9

Values above zero indicate expansion/positive sentiment, values below zero indicate contraction/negative sentiment

However, it is the job market which is most worrying. The indicator is negative for the second consecutive quarter, indicating a further worsening of the employment situation to the lowest levels experienced in 2014. Again here, there is a trend of constant decline with the third consecutive negative drop.

The most recent ISTAT statistics show that in February, compared with the previous month, there were 34,000 more people unemployed and 14,000 fewer employed, with the employment rate returning to 58.6%. The reduction in the number of people employed can be explained by a significant reduction in subordinate employees (-33,000 full-time employees and -11,000 contract workers) which was not compensated by an increase in non-subordinate workers (+30,000). On an annual basis, between February 2018 and February 2019, subordinate employees with a permanent contract decreased by 65,000 positions, while those with temporary contracts increased by +107,000.

6-month job market outlook – March 2019: -16.7

Values above zero indicate expansion/positive sentiment, values below zero indicate contraction/negative sentiment

Finally, companies are also showing signs of uncertainty regarding investment. The rise in the cost of money due to the rise in the spread has begun to be felt and could worsen if the gap differential between BTP and Bund interest rates remains at current levels. Currently, the market requests for Italy earnings are 5 times higher than those of France, 4 times those of Spain and 3 times those of Portugal. Greek earnings are only 1.5 times higher than the Italian ones and the Greek spread is only 40% (100 basis points) higher than those in Italy. The cost of the risk associated with Italy is high.

The impact of the rise in perceived risk is also seen in investment, where the forecast indicator reflects, once again, a lack of confidence.

6-month investment outlook – March 2019: -4.9

Values above zero indicate expansion/positive sentiment, values below zero indicate contraction/negative sentiment

 

To summarize, the Ambrosetti Club Economic Indicator confirms in a significant manner the highly-negative picture of current economic trends. Having concrete, targeted answers from government, institutions and policymakers would be useful. Is public debate almost entirely focused on the very short-term that does not look beyond the next election the ideal environment for stimulating growth?



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