The first quarter of 2018 was characterized by a general continuation of the growth registered during 2017. There is growth and it remains stable, but its intensity is declining, causing clouds to gather on the horizon.
The first quarter of 2018 was characterized by a general continuation of the growth registered during 2017. It should be recalled that 2017 closed with a growth in GDP that was one of the highest in the last 16 years. With a rate of +1.6%, for Italy 2017 was the third-highest year of growth recorded since the introduction of the euro. As has been noted on various occasions, Italy’s rate of growth was lower than all its main European competitors: +2.2% in France and Germany; +3.1% in Spain; +2.9% in the Netherlands. Even the United Kingdom, despite the uncertainty regarding Brexit, grew by 1.7%.
Not only is Italy the slowest among the other European countries, but recent economic forecasts also indicate a possible slowdown in growth. Confidence of companies and consumers is worsening, although not markedly. In the manufacturing sector, industrial orders have slowed and plant utilization has decreased. In other words, there is growth and it remains stable, but its intensity is declining, causing clouds to gather on the horizon.
An important part of growth remains tied to exports which are expected to increase by 5.8% this year, following a stellar performance in 2017 (+7.4%). Forecasts for the three-year period 2019-2021 predict an average increase in Italian exports of 4.5% which should bring exports to over €500 billion in 2019 and €540 billion in 2021. Following years of hiatus, there are positive signs for construction, although the sector remains much lower than pre-crisis levels. Looking at employment in this sector alone, approximately half a million fewer people are employed than the pre-crisis year of 2008.
On the European front, the end of quantitative easing is approaching, a course that characterized the non-conventional expansionist policy of the ECB in recent years to aid the European economy. Currently, the Eurozone is growing at the highest rates in the last ten years and in its last meeting the ECB Governing Council declared that in December 2018 it would stop purchasing government bonds, while underscoring the need for a high level of monetary accommodation. In other words, interest rates will remain low over the long-term and increases are not foreseen until at least the second-half of 2019. Within this context, even without any more net purchases starting in December, the mass of bonds that will fall due and will be renewed remains considerable—in fact, the value of bonds purchased by the Eurosystem is approximately €2,431 billion and the total assets held by the ECB is over €4,500 billion, equal to about 40% of the GDP of the entire Eurozone. Quantitative easing will come to an end, but not the easy credit conditions in Europe.
On an international level, however, the Fed continues its slow increase in interest rates in a US economy with a growth rate of 2.8%, a strong impetus in domestic demand and a job market with an unemployment rate at an all-time low of 3.6%.
On a global level, growth is accelerating and OECD forecasts for 2018 indicate a value of 3.9%, up 0.3% on the beginning of the year when growth was expected to be 3.6%.
The principal risk that this international growth picture not materialize is tied to the fact that the introduction of import tariffs on some goods by the US administration could trigger chain reactions causing restrictions in trade on an international level. Until now, the rise in import duties has remained low in terms of the volume of goods involved, but some signs of a potential widening to more significant sectors with large industrial supply chains (such as the automotive sector) are emerging. If the “tariff war” were to extend to sectors such as automotive, it would most probably have a major impact on global trade and, as a result, on growth.
Within this context, the information regarding sentiment gathered by the Ambrosetti Club is conflicting. The Ambrosetti Club indicators are constructed on the basis of results obtained by a specific survey we conduct every three months for The European House – Ambrosetti business community which is comprised of over 350 businessmen, CEOs and representatives of top management of leading Italian companies and multinationals operating in Italy.
The findings regarding sentiment for the next six months show positive signs on the employment front, while a worsening is foreseen in terms of investment and business expectations. Signs of a downward trend had already emerged clearly in the last survey. The new data confirm this trend and raise the question if we are facing a growth adjustment phase or if, over the coming months, the expansionist push of 2017 will come to an end.
Assessment of the current business environment – June 2018: 42.7
In June, the sentiment indicator regarding the current state of the economy remained at a high level, around 42.7 points, in line — although in slow, steady decline — with the March 2018 and December 2017 findings. This figure confirms the current stability in economic activity, although the same indicator six months ago showed a slowed trend.
6-Month forecast for the business environment – June 2018: 33.3
In fact, in terms of future business prospects, sentiment is 33.3 points, down from 39.3 in March and 43.3 in December.
For employment, on the other hand, there are signs of improvement, albeit conservative. The indicator is at 21.8, which is a new all-time high. As noted on other occasions, unemployment remains high in Italy, both overall (11.2%, still 5% higher than the pre-crisis level in 2008) and among young people (33.1%). Therefore, although positive, these figures must be seen within a context in which the job market remains very weak and in which there are significant differences between the north and south of the country.
6-month job market outlook – June 2018: 21.8
Finally, in terms of investment, sentiment has fallen from 31.3 to 23.9, the lowest level since June 2016. It is likely that the uncertainty linked to the formation of the new Italian government and subsequent market uncertainty impacted on the intent or time frame of new investment by companies. Our hope is that they have only delayed or placed in standby their investments, and not cancelled or rerouted them to other countries.
6-month investment outlook – June 2018: 23.9
In summary, the Ambrosetti Club is still positive about the current business environment in Italy. It is confident regarding further improvement in employment over the coming months, but sentiment is less-positive in terms of investment and business trends in the months to come. Our findings indicate a continuation in economic growth, although at a lower rate. Exports have been and remain a growth driver and the success of Italian companies abroad can also be seen in the trade surplus which was €48 billion in 2017. However, this success is not sufficient to bring Italy’s growth back in line with the Eurozone average which remains higher. We believe it has become clear to all that action must be taken regarding internal demand to broaden the effects of growth by utilizing the margins which exist to invest in sectors with high productivity and with positive spillovers for the economy as a whole.
Managing Partner and Chief Executive Officer,
The European House - Ambrosetti