Despite retreating sentiment in May, we still expect the economy to expand in the second and third quarters of 2016, probably by around 0.3% q/q, matching the first-quarter performance.
IHS perspective | |
Significance | May's sentiment data were disappointing, and highlight the continued concerns of both manufacturers and 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 | Despite the retreat in confidence in May, we still expect the economy to expand in the second and third quarters of 2016, probably around 0.3% q/q. |
According to the National Institute of Statistics (Istat), consumer confidence lost ground for a second consecutive month in May 2016. Specifically, the seasonally adjusted consumer confidence index decreased to 112.7 in May, compared to 114.1 in April and 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 May was triggered by consumers being less upbeat about the current economic climate, with the sub-index for this falling back to a nine-month low of 135.9 in May (down from 140.2 in April and 152.2 at end-2015). Meanwhile, households were more upbeat about their personal situation after falling back in the previous three months, signalled by the sub-index measuring this edging up to 105.4 in May. It remains above past norms (stood at 92.6 at end-2014) as a result of 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 2.2 points to 117.8, moving further away from a historical high of 127.8 in November 2015.
Overall business sentiment appeared to lose some ground during May. A breakdown by sector reveals manufacturing sentiment retreated in May after strengthening in the previous two months. Specifically, it stood at 102.1 in May, compared to 102.7 in April, 103.9 at end-2015 and 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 -15 in May, 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 unchanged at +10. The results from the other sectors showed less confidence in the construction, retailers and private service providers when compared to April. The key sector of market services reported lower confidence, with the overall index falling from 107.9 in April to 107.4 in May (also down from 113.9 at end-2015). A breakdown by service sector activity reveals the index increased confidence in transportation and storage (from 117.7 to 121.7), in information and communication (from 103.7 to 106.6) and in business services and other services (from 102.2 to 105.9) while it decreased in tourism services (from 110.7 to 98.3).
Outlook and implications
The latest survey data continue to lack underlying strength, and suggest the economy is unlikely to gain notable momentum in the second and third quarters of 2016 after growth improved moderately in the first quarter of 2016 after slowing steadily during the second half of 2015. We expect the economy to expand in the second and third quarters of 2016, probably around 0.3% quarter-on-quarter, matching the first quarter performance.
Despite softer consumer sentiment in both April and May, 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. The May survey reports that the sub-index measuring consumers' willingness to undertake major purchases improved from -36 in April to -32 in May, and remains notably higher than -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 five 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 second-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 higher than recent capacity utilisation. According to the European Commission's business and confidence survey, capacity utilisation in industry stood at 76.5% n a seasonally adjusted basis by mid-2016, compared to 77.1% in early 2016, 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 March, and have fallen in almost every month since mid-2012.