Both consumer and business confidence retreated in June, and we anticipate the Brexit vote will damage Italian economic sentiment in the next few quarters, resulting in slower growth in 2017.
IHS perspective | |
Significance | Both consumer and business confidence lost ground in June, and we anticipate a further retreat in line with the fallout from the UK EU exit vote. |
Implications | The latest survey evidence suggest the economy failed to gain momentum in the second quarter of 2016, probably growing by around 0.2% q/q, just below the first-quarter performance. However, we expect Italy's fragile recovery is likely to come under increasing pressure in the second half of 2016 an 2017 in line with the anticipated hit from the fallout of the UK EU exit vote. |
Outlook | Italian real GDP is expected to expand by 0.7% in 2016 (down from 0.9%) in 2016, 0.5% (from 1.0%) in 2017 and remain relatively unchanged at 0.96% in 2018. These are provisional estimates, but broadly similar adjustments will be reflected in our next scheduled forecast update. |
According to the National Institute of Statistics (Istat), consumer confidence lost ground for a third consecutive month in June 2016. Specifically, the seasonally adjusted consumer confidence index decreased to 110.2 in June, compared to 112.5 in May and 114.0 in April. 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 June was triggered by consumers being more downbeat about the current economic climate, with the sub-index for this falling back to an 11-month low of 131.8 in June (down 135.7 in May and 152.2 at end-2015). Meanwhile, households were less upbeat about their personal situation after rising during the previous month, signalled by the sub-index measuring this retreating to a 10-month low of 103.0. But 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 4.7 points to 112.9, moving further away from a historical high of 127.8 in November 2015.
Overall business sentiment appeared to lose further ground during June. A breakdown by sector reveals manufacturing confidence strengthened slightly in June after slipping back in the previous month. Specifically, it stood at 102.8 in June, compared to 102.1 in May, 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 at -13 in June, 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 +9. The results from the other sectors showed less confidence in retailers and private service providers when compared to May. The key sector of market services reported lower confidence, with the overall index falling from 107.3 in May to 105.0 in June (also down from 113.9 at end-2015). A breakdown by service sector activity reveals lower confidence in transportation and storage (from 121.7 to 115.8), in information and communication (from 106.6 to 105.1), in business services and other services (from 105.9 to 105.9) and tourism services (from 98.0 to 97.2).
Outlook and implications
The latest survey data continue to lack underlying strength, and suggest the economy struggled to gain momentum in the second quarters of 2016 after growth improved moderately in the first quarter of 2016 after slowing during the second half of 2015. We believe the economy grew by around 0.2% quarter on quarter (q/q), just below the first-quarter performance. However, we believe that Italy's fragile recovery is likely to come under increasing pressure in the second half of 2016 an 2017 in line with the anticipated hit from the fallout of the UK EU exit vote. Even before the UK referendum, Italy was struggling to develop a more sustainable and broad-based recovery, weighed down by some lingering downturn characteristics after the economy exited its longest post-war recession in early 2015. Unfortunately, the financial volatility and uncertainty triggered by the UK vote are set to engulf the Eurozone and global economies, presenting a further headwind to the recovery momentum in Italy. Our preliminary new central baseline signals a broad-based hit, affecting both consumer spending and business investment intentions, alongside damage to trade flows across the EU (which are partly mitigated by the prospect of weaker euro in the remainder of 2016 and 2017).
Overall, Italian real GDP is expected to expand by 0.7% in 2016 (down from 0.9%) in 2016, 0.5% (from 1.0%) in 2017 and be relatively unchanged at 0.96% in 2018. These are provisional estimates, but broadly similar adjustments will be reflected in our next scheduled forecast update.
Fluctuating business confidence during the first half 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. We had expected industrial capital expenditure (excluding general government investment and residential construction) to recover in the next few years, given we had anticipated a moderate pick-up in growth at home and abroad, as well as higher than recent capacity utilisation. However, we now anticipate some Italian firms are likely to delay capital projects when faced with a new dual threat of weaker near-term growth prospects both in Italy and across the EU in the wake of the UK exit decision. Indeed, this triggers an ever wider spectrum of risks to the investment climate, which already include tight corporate financials and a still-laboured recovery from Italy's longest post-war recession. In addition, we continue to argue disrupted credit channels are major headwind to a more pronounced 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. Worryingly, the impact of the UK exit vote presents a further obstacle to the recovery in credit flows to Italian non-financial firm, with their financial situation already difficult in light of adequate internal financing as a result of weak pricing power and profitability.
Despite softer consumer sentiment in the three months to June, we remain true to our baseline assessment that consumers will be a key engine of growth throughout 2016 and 2017. 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 2016/17. However, we acknowledge the rise in consumer confidence witnessed during 2015 is likely to be pushed back in light of the aftershocks of the UK vote, but Italian households are still enjoying a more a favourable domestic backdrop. Overall, we believe Italian households are in the process of unwinding pent-up demand, and we expect this to continue in the remainder of 2016 and 2017, albeit gradually.