Rising consumer confidence during January was in sharp contrast in business sentiment falling for a third straight month. Therefore, IHS continues to argue that the upside to the recovery in the first two quarters of 2016 is likely to be limited, with growth estimated at 0.3% quarter on quarter.
IHS perspective | |
Significance | Rising consumer confidence during January was in sharp contrast to the business sentiment falling for a third straight month. |
Implications | Improved consumer confidence in early 2016 provides supporting evidence that the outlook for household spending is gradually improving. According to the January 2016 forecast, private consumption is expected to expand by 1.4% in 2016 (revised up from 1.2%). |
Outlook | The economy is projected to expand 1.1% (up from 1.0%) in 2016, according to the January forecast. The economy is likely to enjoy more support from the slide in crude-oil prices in early 2016. |
According to the National Institute of Statistics (Istat), consumer confidence improved in January 2016 to stand at its highest level since the historic series began in January 1995. Specifically, the seasonally adjusted consumer confidence index increased to 118.9 after retreating to 117.7 in December as a result of the Paris attacks in mid-November. The rise in optimism during January was across all the main categories, involving economic and personal, current and future (elevated by the supportive environment of recent income tax cuts, marginal inflation developments, record-low interest rates and revving real household incomes). First, consumers were more upbeat about the current economic climate, with the sub-index for this improving to 153.5 in January, compared to a three-month low of 152.9 in December 2015 and 110.0 at end-2014. Second, households were more assured about their personal situation in January, signalled by the sub-index measuring this rising to 107.6 from 104.5 in December and 92.6 at end-2014. Finally, consumers expressed more confidence about the near-term outlook, with their aggregated views on the future climate (based on assessments on the economy and personal finances) increasing by 0.4 points to near-historical high 127.7.
Furthermore, households reported a slightly less pessimistic view of future unemployment developments, with the index measuring this down by 1 points to +1 in January, but remains below a survey low of -8 in November 2015 (reflecting poor employment data in both September and October). The fall in labour demand was unexpected, but supports our view that net job creation intentions remain soft, with some firms remaining under pressure to limit their workforces when faced with prevailing challenging domestic market conditions and intensely competitive trading conditions.
Meanwhile, overall business sentiment capturing manufacturing, retail, construction and services firms fell for a third straight month in January 2016, dropping to a 11-month low of 101.5 from 105.6 in December, 106.8 in November and 107.2 in October (the highest reading since October 2007). A breakdown by sector reveals that manufacturers expressed less confidence for a third consecutive month in January. Specifically, the confidence indicator for the manufacturing sector decreased to 103.2 in January from 104.0 in December but remains notably higher than 99.6 at end-2014. The new orders situation remains fragile but is less squeezed when compared to 2013/14, with the sub-index for this standing at -13 in January, compared to end values of -19 and -20 at 2014 and 2013, respectively. Despite the still soft new orders environment, firms' production expectations remained positive, with the sub-index measuring this +11 in January 2016. The results from the other sectors were poor, with construction, retailers and private service firms more cautious when compared to December.
Outlook and implications
Improved consumer confidence in early 2016 provides supporting evidence that the outlook for household spending is gradually improving. According to the January 2016 forecast, private consumption is expected to expand by 1.4% in 2016 (revised up from 1.2%), with the upward adjustment a result of the likely boost to household purchasing power from lower than previously anticipated energy costs during the year. Overall, this represents an improving outlook, and results from income-tax cuts, lower energy prices, and negligible inflation. The positive backdrop is providing relief to squeezed households who endured their real disposable income falling for a sixth successive year by 2013 (and to stand 10% below when compared with the previous peak in 2009) before levelling off in 2014 and reviving during 2015. The boost to household purchasing power led to recovering consumer confidence during 2015, with households expressing more confidence about the economy and both their current and future personal situation. Clearly, consumers are able to raise their spending, attracted by generous pricing and boosted by recovering real incomes, but the upturn is likely to be gentle at first. Critically, with Italy just about clambering out of recession around early 2015, alongside disrupted credit markets, some households remain careful about spending on nonessential items. Indeed, cautious spending intentions continue to be flagged up by January's consumer confidence survey, with the sub-index measuring households' willingness to undertake purchases both now and in the next 12 months standing at -21 (down from -36 in December) and -73 (from -72), respectively.
The fall in manufacturing sentiment for a third straight month during January and some uneven industrial data illustrate some risks to the anticipated recovery in industrial investment. Importantly, firms are expected to raise their investment plans during 2016 in line with the improving outlook both at home and abroad and rising capacity utilisation. According to the European Commission's business and confidence survey, capacity utilisation in industry stood at 75.5% on a seasonally adjusted basis by the fourth quarter of 2015, above 73.9% at end-2014 and the survey average (from 1990) of 74.9%. Nevertheless, the industrial investment climate still faces some strong headwinds, namely some firms enduring tight financial results and the prospect of a laboured recovery from Italy's longest post-Second World War recession. The retreat in oil prices will help relieve some of the pressure on companies' margins, which will provide some support to investment and employment intentions during 2016. However, we suspect still disrupted credit channels are preventing a more aggressive upturn in the investment cycle. Worryingly, loans to non-financial firms rose between October and November, expanding by 1.3% m/m to stand at EUR804.376 billion, but were still down by 1.6% on a y/y basis. In addition, doubtful loans continued to climb, and stood at EUR143.339 billion (up 10.3% y/y). This translates to a bad-debt ratio of 17.8% in November 2015, up markedly from 15.9% a year earlier.
Therefore, overall economy growth is estimated at 0.3% quarter on quarter during the fourth quarter of 2015 and the first three months of 2016. Clearly, the situation for Italy remains difficult, and the recovery is far from established, facing some lingering obstacles. Specifically, the economy just staggered out of yet another recession in the latter stages of 2014, while the anticipated resumption of growth in the first three quarters of 2015 was moderate given it was the first gain since mid-2011, and was a poor return from extremely supportive external factors. In addition, a breakdown in terms of expenditure reveals that change in inventories provided the largest contributor to growth in the first three quarters of 2015.
We continue to argue the recovery is dragging its feet in the face of converging external supports. There are currently notable growth drivers for Italy during 2016, particularly coming from an extended period of very low oil prices and considerable monetary policy stimulus, alongside a relatively relaxed 2016 national budget plan underpinned by the abolition of tax on primary residences. In addition, Italian exporters are enjoying some support from the euro's recent retreat; the currency is expected to stand at USD1.10 by end-2016 (compared with EUR1.214 at end-2014) and USD1.18 by end-2017. The recent euro losses will help Italian exports to offset the impact of unhelpful unit labour and nonwage cost developments, which have chipped away at the country's export market shares.
Therefore, the economy is projected to expand 1.1% (up from 1.0%) in 2016, according to the January forecast.