Optimism despite uncertainty

The 15th Ambrosetti Club Economic Indicator survey is now available. Since the last survey in September, many things have changed on the international and national scene.

Optimism despite uncertainty

The year closes with rising expectations and greater confidence in the future

Trump’s victory and the newly-elected president’s pledges for major tax incentives and investment in infrastructure have strengthened the greenback which has reached its highest level in the last 14 years, against the currency basket known as the Dollar Index (the Dollar Index is comprised of the euro (EUR) 57.6%; yen (JPY) 13.6%; British pound (GBP) 11.9%; Canadian dollar (Cad) 9.1%; Swedish crown (SEK) 4.2%; and Swiss franc (CHF) 3.6%).

OPEC signed a global agreement to reduce oil production—the first in 15 years—with the key participation of Russia (the no. 1 crude oil producer in the world) and other non-OPEC countries, as a means to bolster oil prices. The immediate effect was the stabilization of oil prices around 55 dollars a barrel (compared with the pre-agreement price of 45 dollars).

Unfortunately, terrorist incidents continued—in Istanbul, Cairo and Berlin.

On the national front, earthquakes in Central Italy caused major damage with building collapses in 100 municipalities and requiring the evacuation of 40,000 people.
The Renzi government resigned following the defeat of the constitutional referendum and was replaced by that of Paolo Gentiloni who was named prime minister.
As was expected, the Monte dei Paschi di Siena bank was unable to raise funds on the market to increase its capital, and the new government created a 20 billion euro burden-sharing fund for any credit institutions that might find themselves in difficulty in the near future.

Italian and international observers feared that these events (with the sole exception of the OPEC agreement) could have created a potentially very high level of political/economic destabilization. In preceding months, renewed tensions over migration, Brexit, the attempted coup in Turkey and the terrorist attacks in Istanbul, Orlando (USA), Nice (France) and Munich (Germany) had already fueled a climate of uncertainty and tension regarding the future.

Today, future prospects do not seem to have felt the effects of what has happened and some of the events that were so feared by the financial operators, economists and social commentators.

In terms of Europe and Italy, it is very probable that the current situation, which remains tendentially positive in terms of economic and employment growth, is also the result of actions taken by the ECB and the protective umbrella against any speculative attack against the Eurozone.
This past December 8th, the ECB announced it would continue to inject liquidity into the system at a rate of 80 billion euros a month, at a constant and regular rate of 20 billion euros a week, through the purchase of government securities. Starting this coming April, these purchases will continue at least through December 2017 at a slightly lower rate of 60 billion euros per month.
Today, 1 year and 9 months later, ECB assets are worth 35% of Eurozone GDP, compared with the Fed whose assets are worth 25% of US GDP. These numbers underscore the uniqueness, depth and intensity of the ECB’s actions.

Looking to 2017 in Europe, the European Commission and the main European institutions expect continued growth, although at a lower rate.

Regarding Italy, our sentiment indicators have reached record levels, or levels which are close to all-time highs. In addition, all our indicators reflect improvement on the September survey.

In terms of the current business trend, the sentiment indicator has reached a record level, nearly triple the September level and 50% higher than the average of the surveys carried out in the first three quarters of the year, from January to September.

Our indicators are based on the results of a survey we carry out specifically for the Ambrosetti Club business community which is comprised of over 350 businesspeople, CEOs and representatives of top management of leading Italian companies and multinationals operating in Italy.

The indicators should be read as follows: 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 with the forecast of a contraction in economic activity.

Assessment of the current business situation

The indicator regarding current sentiment about the Italian economy is 31.7 points, an all-time high since the start of these surveys and sharply up compared to the 12.2 points registered in September.

6-month business outlook

Positive indications also emerge regarding expectations about economic activity in the near future. The indicator is around 37.3 points, among the best ever and more than triple September’s level. These results show a significant recovery and an increase in confidence over the coming months.

6-month job market outlook

On the employment front, sentiment is also positive and betters the record, reaching 12.7 points, four times higher than September’s 3.3 points. We should underscore the fact that despite the positive values and improvement, the employment sentiment indicator remains lower than the others.

6-month investment outlook

For investment, there continues to be a slow but constant improvement over recent surveys. The indicator is at 29.5 points, up from 25.6 in the third quarter, 23.3 in the second quarter and 15.6 in the first quarter.

The results of the Ambrosetti Club Economic Indicator show positive signs and growth compared with current values in terms of economic activity, employment and investment. Specifically, sentiment regarding the current business situation and future employment are at all-time highs, while the figures regarding future economic trends and investment are very close to record levels.

As was noted in the beginning, despite a scenario marked by turbulence and instability, the sentiment of our business community is on the rise with values that are either at record highs or very close.

Despite the potentially destabilizing factors mentioned above, confirmation of the currently positive situation is offered by Luigi Del Monaco, General Manager of Parmalat and an Ambrosetti Club member. Irrespective of the changes in government, the important factors for business and investment—in which Del Monaco does not envisage major changes—are the country’s stability, and coherence and continuity in the actions of the new government. In fact, political instability is what generates lower consumer confidence and, therefore, can have negative impact on consumption. Parmalat continues to invest in Italy and has no plans to change in the coming months. Emilio Petrone, Managing Director of Sisal Group and an Ambrosetti Club member, also indicates stability and continued reform as the important elements for the Italian economy.

Both agree that moving towards legislative standardization and introduction of the same regulations in Italy’s various regions are indispensable.  For example, Parmalat has ten production facilities in five different regions of Italy, each of which is governed by different laws. Sisal faces gaming laws that are not only different from region-to-region, but also between neighboring municipalities.

And, finally, they confirm importance of continuing towards a reduction in red tape and the overall tax burden on companies.

Events in 2016 could have led to a period of major global instability. Probably the effects of what happened will be seen with time in the near future, but for the moment, the adage that says life is 10% what happens and 90% how we react to events, would seem true.

For now, reactions seem to be positive. Let us hope 2017 will bring maximum serenity and success!

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