The GDP figures for the second quarter have set off alarm bells, highlighting how action must be taken immediately on structural aspects of the economy to foster growth in productivity and competitiveness.
Just a year ago, it was thought that the country had finally gotten back on the right track. In our view, it was on the right path, but in what type of vehicle? Today, it would seem by bicycle, and always in the hope that it doesn’t dismount and continue on foot.
Over 2015, we have seen an inversion in the trend. However, as our findings suggested and as we have forecast on more than one occasion, Italy has not been able to enter fully into a general, across-the-board growth phase in the majority of industrial sectors, or in terms of consumption of families in both the North and South of the country. In other words, we have remained at a 0.X growth level.
Not even some elements that have historically acted as drivers for strengthening economic growth seem to be producing the positive effects that would pull the country out of these stagnant waters. For example, oil prices are currently very low and interest rates are at their lowest rates ever (recently, Italy issued 3-year BTPs at a negative interest rate and 50% of European bonds are offering negative rates), and the ECB and other leading central banks internationally have taken action to stimulate the economy.
It is also true that the less-than-stellar economic performance in recent years is not a phenomenon restricted to Italy. In fact, since the collapse of Lehman Brothers in 2008, the top-50 banks internationally have cut interests rates 672 times, in other words, a reduction in interest rates every three working days, while combining these actions with the acquisition of assets on markets to the tune of over $17 trillion. An enormous stimulus considering that Italy’s GDP is $1.8 trillion.
The prospects from a business standpoint for the coming months do not seem rosy. Our sentiment indicators remain slightly positive, but there has been a worsening compared with recent surveys. In fact, the figures for the indicators that measure sentiment regarding business trends and trends in the job market have dropped by half. For numbers lower than these, we would have to go back to the period between September and December 2014, nearly two years ago.
Our indicators are constructed on the basis of results obtained by a survey we conduct every three months 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 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.
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.
The indicator regarding current sentiment about the Italian economy is 12.2 points, down sharply from the 24.7 points registered in June, and the lowest point since March 2015. Following a positive start of the year, there has been a significant weakening in growth.
The same indication emerges for expectations regarding economic activity over the next six months. The figure remains positive, but at around 11.1, less than half of the 28.2 points registered in June. This does not constitute a recessionary situation, but it is not bright and shows signs of worsening.
Also in terms of employment, there is a drop in the 6-month outlook compared with the June survey. This indicator is at 3.3, down from the previous figure of 8.9 and at similar levels to those registered in March.
However, on an operational level, some positive effects are beginning to be felt in the wake of the Jobs Act, as Erwin Rauhe, Managing Director of Basf Italia says. Labor costs in Italy are beginning to fall, one of the main correction valves regarding market trends, in terms of the impact on total costs. Regarding this, Eurostat has confirmed that labor costs in Italy dropped by 0.8% in 2015, the only country for which this was true in the Eurozone and European Union where they increased, respectively, by 1.3% and 1.9%.
Investment, on the other hand, shows an opposite trend. The indicator is at 25.6, the highest level since the beginning of 2016. This positive outlook for investment is encouraging because it is only through investing that companies become more competitive, and can innovate and hire new employees.
In summary, the results of the Ambrosetti Club Economic Indicator reveal an underlying picture that is fragile and dampens the enthusiasm from the start of the year. We are not in negative terrain, but the outlook for business and employment is worsening compared with current levels. Only investment remains good. We are a long way away from the maximum levels seen in 2015.
It is probable that the recent events in July and August, the attempted coup in Turkey, the terrorist attacks in Nice, the church in Rouen and the shopping center in Munich, as well as other international geopolitical hotspots, could have impacted on the overall sentiment of the business community.
Within this context of uncertainty about the future, examples of resilience in the economy have emerged and some companies continue to invest.
Erwin Rauhe notes that people have become used to working in the midst of an uncertain macroeconomic and geopolitical context. From his standpoint, the market is “doing well structurally” and BASF continues to invest in Italy as shown in its most recent acquisitions, including a company employing 80 people. The deflationary push has lessened and by the end of the year manufacturing prices should show some slight growth, both because of trends in oil prices, but also because of a saturation in productive capacity.
In terms of his sector, Javier Hernandex Sinde, CEO of Gas Natural Italia, notes a few external constraints regarding doing business in Italy. The main uncertainty about the future is connected to regulatory change which will occur over the next year in that part of the market where tariffs are regulated and set by the Italian Regulatory Authority for Electricity and Gas. The setting of tariffs will determine the profitability of investments and this will have an impact on the potential for further investments in the sector. On these questions, the Italian Regulatory Authority for Electricity and Gas is engaged in a constructive dialog with sector operators and sets fixed time schedules. Naturally, the earlier the rules are known, the earlier investments can be made. In addition, for this sector, the overall trend in terms of sales is connected to domestic consumption which is not expected to decrease this year.
Over the next quarter, we will see which mode of transport Italy has embarked upon. We doubt that, by the end of the year, it will be a full-fledged motorcycle, but we hope it will at least be a scooter, and not a bicycle or, even worse, that we will have to proceed on-foot.
Managing Partner and Chief Executive Officer,
The European House - Ambrosetti