Ambrosetti Club Economic Indicator

The economy has begun to recover, but too slowly

Italy has unquestionably inverted the trend, but too slowly, and we are still very far from a return to a growth path which, over a reasonable timeframe, could return us to pre-crisis levels.

The economy has begun to recover, but too slowly

We’re back in the driver’s seat, but of what?
A truck, van … or just a bicycle?

At the end of the summer there was general optimism that the improvement in the economic indicators could be transformed into a more sustained increase in economic growth.

Unfortunately, this did not occur and the third quarter of 2015 closed with an increase in GDP of 0.2%, down from the +0.3% of the second quarter of the year.

In September, we noted that although it was being said that the country was finally on the road to recovery, our figures showed that this road might only be a path … and a narrow one, at that.

In September, the Ambrosetti Club Economic Indicator for sentiment showed a turn-around compared with the trend toward improvement seen up to that point. Overall, our set of indicators evidenced a slight upturn in the economic situation, but the drop in the outlook for the future indicated a lack of further acceleration compared with the growth registered in the first half of the year.

Italy has unquestionably inverted the trend, but too slowly, and we are still very far from a return to a growth path which, over a reasonable timeframe, could return us to pre-crisis levels.

Projecting current growth estimates, it would take another 6-7 years to return to the GDP levels before the crisis of 2008, and 8-10 years to return to pre-crisis levels of investment … decidedly too long!

This is not impossible. Spain is growing at a rate of 3.4%, Germany 1.8%, the United Kingdom 2.3%, the Netherlands 1.9%, Portugal 1.4% and France 1.2%. We are growing by 0.8%.

The challenge is escalating and intensifying. While until a few months ago we could count on exports as a growth factor, today with the turmoil caused by the slow-down in China and problems in many emerging countries (Brazil and Russia are in economic recession with GDP forecasts between -4% and -5%), in the coming months, our hopes for recovery will lie in private domestic consumption which represents over 60% of Italian GDP. This is what the strength of our growth will be measured against.

One thing needs to be clarified about this, immediately. To be real, a significant and sustainable recovery in the economy and consumption must be across-the-board involving the majority of industrial sectors in Italy, consumption of families in the north as well as the south, and corporate investment.

Currently, however, recovery remains anchored in only some economic sectors and geographical areas of the country. I was very struck by a figure that emerged from our economic observers on the ground. The gap between Lombardy and Calabria in terms of GDP at parity of purchasing power is 135%.  This means that, on average, in real terms, someone living in Lombardy can purchase 135% more goods or services compared with someone in Calabria. The gap between Germany and Greece is just 68%. In essence, the difference in purchasing power between Italy’s north and south is double that between people living in Germany and Greece.

This makes a real, serious policy for relaunching the south of Italy even more urgent.

In terms of corporate investment, a recovery can be seen, but it is also very slight. We see an improvement in the credit market which, following years of decline, has stabilized, even if the figures reflect a spotty situation: overall credit to business is still down by 0.8% compared with 2014, but there is a +1.8% acceleration in manufacturing companies that indicates an upturn in production.

For 2016, a number of tax breaks for real estate are planned, starting with the removal of the tax on primary residences which, as intended by the government, would not only contribute to rebuilding confidence, but also provide new strength to the sector that has been worst-hit by the crisis: construction. Recovery in this sector—an aspect that until now has been missing—would make a decisive contribution to fully getting back on the path to growth, considering that, since 2008, 500,000 jobs have been lost, a full 25% of all those employed in construction.

There are positive aspects for 2016, although we are strongly dependent on external factors. One of the most important is the zeroing of the cost of debt for Italy which, recently placed 2-year BTPs (multi-year treasury bonds) at 0% and 6- and 12-month BOTs (treasury bills) at negative rates. In fact, investors are paying Italy to keep their money and the tax due on 10-year bills is lower than that in the United States. This is something that never happened before in Italy, and it shows the tremendous efficacy of the measures implemented by the European Central Bank. Measures which will continue until at least March 2017, but not in eternity.

Another favorable element is the cost of oil which, recently, has been $38 dollars per barrel, the lowest level in eight years, accompanied by a drop in many raw materials that are at an all-time low. For our manufacturing-based economy, such low raw materials prices are the equivalent of an expansionary fiscal policy.

In the most recent figures for December, the Ambrosetti Club Economic Indicator shows some positive signs compared with the September readings: there is an improvement in economic sentiment for the coming months, as well as employment and investment

Our indicators are constructed on the basis of results obtained by a survey carried out specifically for the business community of The European House-Ambrosetti Club which is comprised of over 350 businessmen, CEOs and representatives of top management of leading manufacturing, banking and service sector 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.

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 forecasts a contraction in economic activity.

Economic situation in Italy

The sentiment indicator for the current situation of the Italian economy is 26.9 points, slightly up on the third quarter (25) and with values similar to those registered in June. What emerges, overall, is a consolidation of the economic situation we have inherited from the first three quarters of this year.

Ambrosetti Index_Situazione economica italiana_dicembre 2015

Source: The European House – Ambrosetti

The slight improvement in economic sentiment appears even stronger if considered together with the indicator for the expectations for growth.

6-month Economic Outlook

Ambrosetti Index_Prospettive economiche_dicembre 2015

Source: The European House – Ambrosetti

The indicator for the economic outlook is positive once again, +10.9 on the values registered in March and June.

The upswing in the December index compared with September—if confirmed over the coming months—should push economic growth to levels that are higher than current ones.

6-month Employment Outlook

Prospects for improvement in the job market continue to improve, although slowly. This indicator is now at 11.5, the highest point both for 2015 as well as when our survey began. As we noted in previous newsletters, the improvement in the job market must be seen as a consolidation of the positive results in recent months which represent a slight improvement in a very difficult situation, and in which youth unemployment is around 40%.

Ambrosetti Index_Occupazione_dicembre 2015

Source: The European House – Ambrosetti

In terms of the financial sector, Fabrizio Zenoni, Managing Director of Santander Global Banking and Markets, notes that, in terms of employment, there has been no improvement.

Historically, finance is a harbinger of economic trends, but it is currently undergoing an exceptional and profound process of transformation and rationalization that will continue to exert pressure on employment. Therefore, in the financial sector, there are still many problems to be solved before an improvement in the employment trend will  be seen. It is more probable that improvement will be seen in a number of manufacturing and service sectors.

6-month Investment Outlook

The investment indicator has also continued to improve gradually and consistently since the beginning of the year, reaching an all-time high of 32.7.

Ambrosetti Index_Investimenti_dicembre 2015

Fonte: The European House – Ambrosetti

Investment itself is an indicator that mirrors future expectations because companies invest when they foresee, or think, there will be an economic upturn.

Investment, especially in the current economic phase, is a fundamental component for returning to growth, as Fabrizio Zenoni makes clear.

Among the motives holding back companies from investing are the lack of certainty regarding the legal system, excessive red tape, lack of fiscal clarity and uncertainty regarding the timeframe for debt collection. Zenoni is very clear on this point. Despite the fact their work and orders are growing, many businessmen hesitate to invest because they are unable to foresee with reasonable certainty the total costs involved in new investment, what the returns will be and the relative timeframes. For example, over a given number of employees, the impact on training costs, corporate flexibility and taxes they will face is hard to estimate, and these uncertainties dampen investment. How much time is required for a permit, what red-tape will a company have to face, what taxes will have to be paid and when, and how long will debt collection take? The answers to these questions arrive months later and, often, are not even definitive. Added to this is an entrepreneurial class that is not always prepared to take on the new challenges and which has a hard time facing generational turnover and globalization.

Agostino Re Rebaudengo, founder of Asja Ambiente Italia and president of assoRinnovabili is concerned about the trend in the renewable energy sector in terms of investment in 2016, also on the basis of the major decline seen in 2015 as a result of the “barrier measures” introduced by the Italian government.

In general, despite the fact that in COP21 major goals for reducing CO2 emissions were identified and that, for the first time, participating countries agreed unanimously that man was the cause of climate change, the implementation times in both Italy and Europe as a whole risk being very long. Within this context, because it is highly capital-intensive, investment in this sector is aided, on the one hand, by the very low interest rates, but is held back by the slowness with which decisions are made on a national level.

In summary, the Ambrosetti Club Economic Indicator shows a consolidation of the slightly-positive current sentiment in terms of the economic situation, employment and investment. Sentiment regarding the outlook for the future is positive once again and indicates an improvement in growth over current values.

Generally, for Zenoni, “the horse wants to drink, but only a little”. Some signs of recovery can be seen, but have yet to begin to “gallop”.  Some trends are more tied to physiological aspects of recovery led by a rebuilding of inventory or replacement of current assets, than the existence of an underlying push for growth. There is not enough water to refresh a horse suffering from a number of pathologies. What is required is system-wide reform to aid companies to find their entrepreneurial spirit once again and identify long-term strategies and goals as a prelude to renewed investment. The political system must help to bolster image as support and communications for companies and marketing for foreign investors. This is why in the growth forecasts mentioned at the beginning, Italy does not “shine” among European countries.

For 2016, prospects remain positive. Many factors, such as low oil prices, competitive Euro and low interest rates will continue to help the economy over the next year. Within this context, we believe the estimate for Italy for the coming year of a growth rate between +1.3% and +1.6% is attainable.

Attainable? Yes. Realistic? Perhaps. Zenoni is convinced that the potential is there and that these levels can be attained, but a number of absolutely necessary aspects must be taken on immediately: the banking system should be restructured, with greater clarity in the new regulations; the tax system must be designed to attract foreign capital and provide incentive to investment and corporate recapitalization; and the judicial system must become efficient and provide certainty to economic operators. We are extremely behind regarding these aspects.

For the renewable energy sector, Agostino Re Rebaudengo notes that, although on one hand such a low price for oil could reduce the competitiveness of renewable energy sources, it also represents an opportunity to accelerate and utilize part of what is saved on the energy bill to invest in a sector which, over the long-term, will generate benefits in terms of health and the environment and, as a result, the economy. In addition, some regulatory measures for what is known as Sustainable Energy Utility  (SEU), the growth of distributed generation, the option of producing methane from biomass and distributing it via the energy grid, etc., are all elements that would reduce polluting emissions and would allow Italy to no longer hold the unfortunate no. 1 place in the EU for premature deaths from smog, as well as allow the renewable energy sector to grow and generate wealth and employment, while also improving the environment.

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