Overview

AMBROSETTI CLUB ECONOMIC INDICATOR

Italy on the road to recovery: great expectations

The rules and models we have used until now to analyze the economy no longer seem to be very relevant, if at all. The technological revolution underway, the processes of digitalization and automation, an aging population, changes in consumption patterns and increased trend towards globalization could have modified, even substantially, the economic paradigm with which we were familiar.

Italy on the road to recovery: great expectations

The rules and models we have used until now to analyze the economy no longer seem to be very relevant, if at all. The technological revolution underway, the processes of digitalization and automation, an aging population, changes in consumption patterns and increased trend towards globalization could have modified, even substantially, the economic paradigm with which we were familiar.

Today, economists and central banks declare that they do not have all the tools they need to interpret this new situation and that, often, they are navigating in unexplored waters. Proof of this is that events which until not long ago would have triggered strong reactions on financial markets and in the economic system are today virtually ignored.

The main indices of the American stock market — Dow Jones Industrial Average, Nasdaq 100 and S&P 500—have churned through one record after another, setting all-time records numerous times throughout the year. With its November closing, the S&P 500 registered 13 straight months of positive earnings, demonstrating its lack of concern about either tensions with North Korea or the spate of problems encountered by Trump in convincing a significant share of the Republican Party to modify the Obama healthcare program—a trend that flies in the face of the soothsayers who, especially in the Anglo-Saxon world, consider 13 to be an unlucky number.

In this scenario, the Fed is moving towards the third increase in interest rates since 2015 (the most recent decreed by chairman Janet Yellen, who in March 2018 will be replaced by Jerome Powell). Unemployment has dropped to 4.1% and GDP has increased by 2.1% on an annual basis.

2017 was also a year of growth in Europe, at a rate nearly double that forecast last year in this period. Again here, Catalonia government’s move to secede from Spain had little or no impact on the economy and markets.

In addition, despite the unprecedented efforts by the world’s main central banks, inflation also seems to have fallen off the radar and no longer responds to the rules that governed it just a few years ago.

Historically, the economy taught us that interest rates and the amount of cash in an economy have a significant impact on inflation. After ten years of low interest rates and injections of liquidity by all three of the largest central banks on the planet, inflation remains low and far removed from the 2% target. Germany’s strong opposition to liquidity injection by the ECB was justified by a fear of a resulting explosion in inflation. Today, in the Eurozone, core inflation is stable at 0.9%, at 0.8% in Japan and 1.7% in the US. The over 14 trillion dollars in liquidity injected into the economic system by the European Central Bank, the US Federal Reserve and the Bank of Japan have had scarce impact in terms of inflation acceleration.

Recently, the only example of a connection between political measures and the economic and financial response is the case of Britain. The referendum results produced an outflow of capital from the United Kingdom with a resulting depreciation in the pound sterling which, in turn, caused a price increase in all imported goods and a loss in British consumer purchasing power. This also resulted in a rise in inflation (over 3% in November), but which was more the result of financial phenomena (capital outflows and sterling depreciation) than a healthy growth in demand.

But how strong is the relationship between political decisions and economic trends? We may learn more in coming months by observing what happens in Germany and Italy. In fact, for the first time, Germany finds itself unable to form a cohesive government with full powers due to the political fragmentation following the most recent elections. In Italy, it is probable that in the upcoming elections, no single political grouping will have sufficient numbers to form a government on its own. Historically, the absence of a stable government in a country runs parallel with greater financial and economic instability. However, once again, it should be noted that Spain remained without a government for nearly all of 2016, but grew by 3.2%, compared with 1.9% in Germany and 0.9% in Italy, both of which had governments in power.

Currently, Italy is going at a rate of 1.7%, excellent headway for 2018. Growth accelerated in the second half of the year, as had already emerged from our forecast indicators on the health of the economy, corporate investment and employment which were at their highest levels in recent years.

The findings of the Ambrosetti Club Economic Indicator for the fourth quarter of this year confirm and reinforce these indications. Our indicators update the all-time highs in all aspects. The current assessment of business trends and outlooks for employment and investment are at record levels since the survey began. The results not only confirm growth over the next few months, but also further acceleration compared with the current situation.

As is known, our indicators are constructed on the basis of results obtained by a survey we conduct every three months for the Ambrosetti Club business community which is comprised of over 350 businessmen, CEOs and representatives of top management of leading Italian companies and multinationals operating in Italy.

Assessment of the current business situation – 44.4 in December

 

In December, the sentiment indicator regarding the current economic situation reached an all-time high of 44.4 points, up 6 points from September levels (already a record high) and 16 points higher than the June survey.  Not only does our business community see the current economic situation in a positive light, but it also expects the recovery to further accelerate.

In terms of forecasts regarding employment, the level is 21.1, an improvement, albeit moderate, over the record high seen in September. This confirms the September findings.

6-month job market outlook – 21.1 in December

 

Sentiment regarding investment is also at a record high of 34.4, up over 2 points on September levels.

6-month investment outlook – 34.4 in December

 

In our view, the growth in investments which has remained stable over four quarters is very positive. It is also a sign of trust that companies have in Italy’s economy and the future. Investments have a positive effect on potential and future growth which, in turn, has a positive effect on employment and opportunities for young people and talent.

Conclusion

To conclude, our indicators provide positive signs on all fronts, even if in the labor market the improvement this year has not lifted the country out of the danger zone: unemployment remains very high at 11.1%, although lower than last year’s 11.7%. Confirming this positive outlook are also the direct responses we receive in regular meetings of our business community which indicate that, in many economic sectors, sales and future orders have returned to values that equal or surpass pre-crisis levels.

Finally, in Italy, we can expect an economic trend in 2018 that is even higher than the forecasts released by the main global institutes, irrespective of the results of the upcoming elects.

Just look at Spain!




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