The turning point has arrived. As forecast by our indicators at the end of last year the first quarter of 2015 showed an increase in business activity and a resumption of investment. After nearly four years of uninterrupted contraction of economic activity, the negative trend finally became positive between January and March 2015.
The turning point has arrived. Minuses have become pluses again before many of Italy’s economic indicators. As forecast by our indicators at the end of last year the first quarter of 2015 showed an increase in business activity and a resumption of investment. After nearly four years of uninterrupted contraction of economic activity, the negative trend finally became positive between January and March 2015.
Of course, a plus sign in front of GDP for a quarter isn’t enough to change the economic picture that is the result of seven years of difficulties, but the prospects seem to have changed and indicate a consolidation of the positive trends under way.
A further strengthening over the next 6-8 months of the trends currently in motion, in particular in company orders and exports, allow us to say that, after years, growth has (finally) returned to Italy.
Unquestionable the driving thrust produced by the quantitative easing of the European Central Bank that rapidly and extensively reduced market rates (to create a negative Euribor) thus significantly reducing the cost of refinancing on newly-issued debt for member countries, with immediate savings for public coffers. The stabilization of the euro/dollar exchange rate at low levels for the euro, as well as the stabilization of oil prices at low levels have resulted in further economic stimulus.
After having predicted a recovery in the first quarter, the Ambrosetti Club Economic Indicators show a consolidation of these results also for the second quarter in all areas we monitor and observe.
Our indicators are constructed on the basis of results obtained by a survey carried out specifically for the business community of our Club 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 we obtain a 360° perspective on information about the outlook our business community has on their business, planned investment, on sales and stock trends, new orders and the evolution in the markets for its good and services.
Values of indicators 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 for the Italian economy shows a new record since 2013, reaching 28.2 and exceeding the record level previously recorded in March 2015 of 26.0. The positive figure for the first quarter is confirmed and there is a further consolidation in growth compared with March. Nonetheless, no further acceleration in growth is seen, but the—positive—trend of the first quarter is maintained.
Economic situation in Italy
As also emerges from interviews and meetings with Ambrosetti Club members, a large part of this inversion in the trend is aided by positive external factors.
Erwin Rauhe, Vice President and Managing Director of BASF Italia, notes that the growth is visible and tangible, but is largely due to cyclical (i.e., non-structural) external factors: the increase in foreign demand for Italian products, aided by the depreciation of the euro, in particular against the dollar; the reduction in oil and raw materials prices; and the cost of money that has reached an all-time low.
To render the recovery structural, there must also begin to be an improvement in domestic consumption which, it should be remembered, including both private and public consumption, is 75-80% of Italian GDP.
On this front, the figures are less-positive and photograph an economy still at the starting gate even if, as Erwin Rauhe points out, there are positive signs of recovery in consumption, for example in the automotive and construction markets. If deflation represents a general worry for the system because it incentivizes consumers to delay purchases given the prospect of a reduction in the prices of goods they desire and thus feeding a negative spiral, in the sectors in which BASF operates this phenomenon is not seen in a significant way, but the recovery in consumption is tied more to a question of trust in the system and the future, rather than intertemporal choices.
The positive sentiment recorded by the indicator for the current situation is reinforced by expectations for growth in the future.
In fact, for the end of the year, the indicator of future outlook shows further growth compared with current values. More precisely, the indicator for the current economic situation is expected to increase by 10 points, which means it should be near 40 points by the end of the year. This represents a very significant increase compared with the value of 3.4 registered this past December.
6-month Economic Outlook
Considering that it is only normal that with an increase in economic activity and improvement in indicator values the prospects for further improvement – given a higher starting point – tend to decrease, this value would seem to suggest that not only may we have turned the trend around and halted the decline, but that we are also at the start of a longer growth trend that could reactivate the entire economy.
Briefly put, businessmen and the top management of Italy’s leading companies are confident and have positive feelings about the future of business which is expected to continue to improve until the end of the year.
Significant confirmation of this is also seen in statistics regarding the outlook for employment. This indicator is at 8.2, consolidation of the positive figure registered this past March. Sentiment about employment is positive, in line with the values of the first quarter and up sharply compared with the end of 2014 (-21.6).
The job market today is more flexible and attractive, thanks to the reforms recently launched and lowering of employment-related tax breaks, but more needs to be done. Especially regarding the corporatist protectionism that exists and fierce defense of existing rights that give rise to perplexity, especially if seen in relation to the current situation, as Erwin Rahue notes.
Nonetheless, knowing how critical the situation on the job market is and looking at past indicators regarding employment, these positive signs should be interpreted as a slight improvement in a situation that remains very difficult.
In fact, the numbers regarding unemployment remain alarming if compared to pre-crisis levels. Unemployment was 6.2% in 2007 and today is more than double that at 12.6%. For months now, youth unemployment has been around 43%. Even more serious, “NEETs” (Not in Education, Employment or Training) are 26% of the total for young people. We are in next-to-last place in the EU-28 where the NEET average is 15,9%. In Germany it is 8.7%, in France 13.8% and the United Kingdom 14.7%. Concerted action must be taken around this and the positive signs that have emerged must be strengthened and confirmed over coming quarters.
6-month Employment Outlook
The indicator for investment confirms the very positive number registered in the first quarter of 2015 following a neutral period around zero from the second half of 2014. Just as with the indicator for sentiment regarding employment, the investment indicator shows marked prospects for an increase, but this increase should be seen in relation to current values which, it should be remembered, are at an all-time low. In fact, between 2007 and 2014 investment decreased by an alarming 30%.
We are well aware that without investment there can be no innovation, and without process or product innovation there is no growth and it is impossible for companies to maintain market competitiveness.
Ottorino La Rocca, President of Valagro, is even clearer about this point, stressing the error of putting in a category of excellence companies which invest. Normal companies and those that want to remain competitive invest, and there is nothing “excellent” in being innovative because that is just what companies must do.
6-month Investment Outlook
In summary, the Ambrosetti Club Economic Indicators show a consolidation of the positive first quarter sentiment regarding the economy overall, employment and investment.
Having said this, there is no reason for euphoria. The trend has been reversed and the economic decline has been stopped. However, this trend must be reinforced by making growth structural and not cyclical by pursuing the long-term course of reform that has been embarked upon.
It is fundamental that competitiveness be regained and that we return to full economic growth without obstructing the development of our talents, our young people and our entrepreneurs. Today there is an enormous and serious waste of intellectual capital that requires immediate action. To mark its first 50 years, The European House – Ambrosetti has decided to link its celebrations through a series of activities examining this issue, so urgent for the country, by putting emphasis on entrepreneurs as the most important driver for the economy and the primary propulsive force that produces growth, innovation and employment.
Erwin Rahue and Ottorino La Rocca agree about the direction to be followed. First of all, look to reforming public spending by eliminating wasteful expenditure, something that has been talked about for years but about which no one has been able to take action and little has been done. Move rapidly towards reform that brings the public administration up to the efficiency levels of the private sector, reducing taxes overall and on employment in particular by truly dedicating the proceeds from the fight against tax evasion to this purpose. In this regard, it should be noted that in many sectors the cost of labor is equal to that in Germany, but once taxes have been paid, workers have a much lower level of disposable income.
Finally, reform of the judicial system to ensure legal certainty is another essential area where action is needed. Ottorino La Rocca stresses this question, without which it is impossible for a company to plan its future investments and activities where economic returns are seen over the medium-term (3-5 years). Continuously modifying regulations and laws within this time frame means discouraging and, in the worst case, blocking corporate investment.
N.B.: the data contained in this survey do not take into consideration the potential impact of Greece leaving the euro which, as of this writing, is still unresolved. Despite the fact that Greece represents less than 2% of Eurozone GDP, its exit from the single currency could have significant negative effects on the economy and economic forecasts for Europe over coming months.
Managing Partner and Chief Executive Officer,
The European House - Ambrosetti