Overview

AMBROSETTI CLUB ECONOMIC INDICATOR

Italian economic/financial uncertainty rises, business sentiment worsens. No investment = No work = No growth = No future

The good news is that Italy continues to grow. The bad news is that it is doing so at an inexorably slow pace.

Italian economic/financial uncertainty rises, business sentiment worsens.  No investment = No work = No growth = No future

The estimates for the growth in Italy’s GDP for the second quarter of 2018 are around 0.2%, down from the 0.3% of the first quarter, less than the 0.4% of Germany, 0.6% of Spain and 0.7% of the Netherlands, and half of the Eurozone average which registered a growth in GDP of 0.4%. The good news is that Italy continues to grow. The bad news is that it is doing so at an inexorably slow pace.

There have been 16 quarters of continuous growth (4 years) in which Italy has amassed an overall level of growth of 4.5%, just over 1.1% per year. Despite this, GDP remains below the 5.8% of 2008 and the 0.2% growth in the second quarter of 2018 is the lowest in about two years (since the third quarter of 2016).

The problem remains the same: Italy is growing, but less than others. Too slowly, and it has not been able to return to pre-crisis levels as all its major competitors have. It continues to be the caboose in all of Europe and the Eurozone in particular.  The push towards growth seems to evaporate within an extraordinarily expansionist European and international context. For example, in the second quarter, the United States had an annual growth rate of 4.1%.

Further concern is tied to the end of the ECB’s QE and potential impact on the cost (and sustainability) of Italy’s public debt, as well as interest rates for banks and private individuals. It should be noted that in 2019 approximately €300 billion in Italian government bonds will fall due. Simulating an average increase in all issues of 1%, Italy will have to pay, on average, an additional €3 billion each year. In addition, in Cernobbio at TEH-A’s 44th annual forum to be held this coming weekend, a major study we have prepared with the technical contribution of Carlo Cottarelli will be presented. The study provides concrete information about the impact the end of the ECB quantitative easing could have on the Italian banking system and public debt in terms of a range of scenarios involving the macroeconomic situation, interest rates, inflation and primary surplus. In addition, tension around the Budget Law had an impact on the performance of the Milan stock exchange which has gone from being one of the best before the formation of the government (+11.2% in January 2018 and +1.7% in the Eurostoxx 50) to one of the worst (-15% following the formation of the new executive to the end of August and -3.2% in the Eurostoxx 50).

This downward trend on the economic/financial front is also mirrored in daily business activity. In fact, as was already seen in the previous Ambrosetti Club Economic Indicator survey published in Il Sole 24 Ore, the period of uncertainty experienced immediately following the elections was worsening and continues to worsen corporate sentiment. Our findings regarding the third quarter, July-September, confirm this downward trend in terms of the sentiment of corporate management and businessmen.

This is a negative sign considering that our indicator anticipates the economic cycle. The assessment regarding the current business environment in which companies operate is nearly halved (despite the very strong international economy). The 6-month business outlook is down to that of June 2017 levels, more than a year ago. Although remaining on the plus side, sentiment regarding employment has literally collapsed to the lowest levels ever.

As is known, the Ambrosetti Club sentiment indicators are constructed on the basis of results obtained by a specific survey we conduct every three months within our business community which is comprised of over 350 businessmen, CEOs and representatives of top management of leading Italian companies and multinationals operating in Italy. From this survey and regular meetings we obtain information about the outlook the business community has regarding planned investment, sales and stock trends, new orders and the evolution in the markets for its good and services.

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.

The current sentiment indicator regarding the Italian economy is 27.8 points, sharply down from the 42.7 points in the previous quarter and it is the largest decrease ever seen in a single quarter since the inception of the index in 2014.

Assessment of the current business environment – September 2018: 27.8

N.B.: values above zero indicate expansion/positive sentiment; values below zero indicate contraction/negative sentiment

Negative signs, although less-serious, are also seen in the 6-month outlook for business. The indicator decreased for the third consecutive quarter and is now at 30.5 points, compared with 33.3 points in the second quarter. Future sentiment—although not recessionary—shows ongoing signs of worsening.

6-Month forecast for the business environment – September 2018: 30.5

N.B.: values above zero indicate expansion/positive sentiment; values below zero indicate contraction/negative sentiment

The most serious concerns are seen on the employment front. The indicator regarding expectations in the job market is nearly zero and is at the lowest level since 2015, although remaining on the plus side. The indicator is currently at 4.2, down from 21.8 in the second quarter of 2018.

6-month job market outlook – September 2018: 4.2

N.B.: values above zero indicate expansion/positive sentiment; values below zero indicate contraction/negative sentiment

Investment, on the other hand, has settled following the collapse in indicator results in the previous two quarters. The continued positive outlook for investment is a point of optimism—the only positive note in this quarter’s Ambrosetti Club Index. It is also clear that the effects on this variable of any provisions or changes in the economic climate will be seen a few quarters from now. In fact, most investment is planned over the medium-term.

6-month investment outlook – September 2018: 27.8

N.B.: values above zero indicate expansion/positive sentiment; values below zero indicate contraction/negative sentiment

To summarize, the Ambrosetti Club findings reveal a picture of fragile growth and renewed worries about employment, thus dampening the positive impacts of the strong, continuous growth seen on the international front. The indicators are not in negative territory, but the outlooks of our community are sharply down both in terms of the prospects regarding the current business situation and for employment. In other words, we are throwing away the monumental opportunity offered by the homogeneous and coordinated growth surge in all other areas of the world.  It is very likely that the upcoming Stability Pact will mark a parting of the waters in the short- to medium-term for the sentiment in financial markets and their perception of Italy. We had a foretaste of this with the Fitch evaluation which, although it did not modify the rating, did change the outlook from stable to negative, thus highlighting the political instability and solidity of public expenditure as the two main risk factors for the Italian economy.  On the economic front, on the other hand, the focus must be on growth to fill the gap which, unfortunately, still exists between Italy and the Eurozone country average. The goal should be to regain the position occupied in the past, which means moving faster than others, and not just faster than yesterday. One area of concentration is digital technology. The public and private sectors must take full advantage of the potential of the digital economy. In this area, as in others, the trend in Italy is “slightly positive” in terms of investment, growth and employment. In other words, this means we are doing nothing, or very little. The figures should be growing sharply, and not just slightly, in order to take advantage of one of the drivers for change, increase in productivity and innovation available to us.



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