Mixed consumer and business confidence during April provide further evidence that the economy is likely to regain limited momentum after growth slowed steadily during the second half of 2015.
IHS perspective | |
Significance | April's sentiment data were a mixed bag, with improved business confidence offset by more cautious consumers. |
Implications | The latest survey data lack underlying strength, and suggest the economy will regain limited momentum after growth slowed steadily during the second half of 2015. |
Outlook | We expect economic growth to pick up modestly in the first half of 2016, probably to 0.25% to 0.3% q/q range, with consumers taking the lead. |
According to the National Institute of Statistics (Istat), consumer confidence lost some ground in April 2016. Specifically, the seasonally adjusted consumer confidence index decreased to 114.2 in April, compared to 114.9 in March. It had stood at 118.6 in January 2016, the highest level since the series began in 1995, and was due to the abolition of the property tax on primary residences. Weaker optimism during April was triggered by consumers being less upbeat about the current economic climate, with the sub-index for this falling back to an eight-month low of 140.5 in April, down from 142.7 in March and 152.2 at end-2015. Meanwhile, households were less assured about their personal situation for a third month in April, signalled by the sub-index measuring this edging back to 104.8 in April. Nonetheless, it remains above past norms (stood at 92.6 at end-2014) as a result the supportive environment of a lower tax burden and marginal inflation developments elevating real household incomes alongside record-low interest rates. Finally, consumers expressed less confidence about the near-term outlook, with their aggregated views on the future climate (based on assessments on the economy and personal finances) decreasing by 0.4 points to 120.2, moving further away from a historical high of 127.8 in November 2015.
Overall business sentiment capturing manufacturing, retail, construction and services improved in April. Specifically, it rose to 102.7 in April, compared to 100.2 in March and 103.2 in February. A breakdown by sector reveals manufacturing sentiment strengthened for a second straight month to 102.7 in April but remains short of a historical high of 105.4 in October 2015. The new orders situation remains fragile but is less squeezed when compared to 2013/14, with the sub-index for this standing at -14 in April, compared to end values of -19 and -21 at 2014 and 2013, respectively. Despite the still soft new orders environment, firms' production expectations remained positive, with the sub-index measuring improving by one point to +10 in March 2016. The results from the other sectors showed improved confidence in the construction and private service providers when compared to March. However, retailers were more downbeat, with the sentiment index falling from 104.9 in March to 102.0 in April.
Outlook and implications
The latest survey data lack underlying strength, and suggest the economy will regain limited momentum after growth slowed steadily during the second half of 2015. Despite extremely supportive external backdrop, GDP developments were moderate throughout 2015. Clearly, the recovery in Italy lacks robustness, while economic and financial tensions across the globe add another layer of uncertainty to an already challenging 2016 outlook. Overall, we argue that both economic sentiment and PMI developments during early 2016 are indecisive, and suggest a limited pick-up in growth in the first half of 2016 after slowing steadily in the second half of 2015. Economic growth is projected to accelerate modestly in the first half of 2016, probably no more than 0.3% q/q. This was preceded by the rate of expansion slowing for a third straight quarter when real GDP grew by just 0.09% quarter on quarter (q/q) in the final quarter of 2015.
Despite softer consumer sentiment in April, we remain true to our baseline assessment that consumers will be a key engine of growth throughout 2016. The positive backdrop of recovering real household incomes as a result of favourable consumer price developments, falling energy costs and the abolition of property tax on primary residences will underpin further consumer spending gains throughout 2016. 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 release their pent-up demand, underpinned by generous pricing and boosted by recovering real incomes, and this theme will remain intact throughout 2016. Although the April survey reports that the sub-index measuring consumers' willingness to undertake major purchases deteriorated from -28 in March to -36 in April, it remains notably higher of -89 at end-2014. Still, it signals that the upside to consumer spending during 2016 is likely to be limited by still difficult labour market conditions and disrupted credit channels in line with banks continuing to report troubling levels of bad loans.
Fluctuating business confidence during the first four months of 2016 illustrates the risks to our baseline assessment that the sector's fixed investment will undertake a long-awaited recovery during the next few years. Specifically, according to our first-quarter 2016 detailed forecast round, we expect industrial capital expenditure (excluding general government investment and residential construction) to recover gradually in the next few years. Importantly, firms are expected to raise their investment plans during 2016–17, in line with a moderate pick-up in growth both at home and abroad, as well as rising capacity utilisation. According to the European Commission's business and confidence survey, capacity utilization in industry stood at 77.1% on a seasonally adjusted basis by the first quarter of 2016, above 75.9% at end-2015, 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 a still-laboured recovery from Italy's longest post-war recession. The recent oil-price retreat will help relieve some pressure on companies' margins, which will provide some support to investment intentions. However, we suspect disrupted credit channels are preventing a more aggressive upturn in the investment cycle. Specifically, loans to non-financial firms continued to retreat in February, and have fallen in almost every month since mid-2012.