LONDON: The Italian economy to grow 0.6% in 2015 and 0.9% in 2016 which signifies a cautious outlook, given we remain wary about major obstacles preventing a sharper recovery in still soft domestic demand conditions, namely dysfunctional credit markets and rising unemployment, according to By Raj Badiani, Senior Economist, HIS.
“The less positive consumer and business confidence developments during both April and May illustrate the continued recovery obstacles.
“The risk remains that the favourable backdrop fails to spark a noteworthy recovery in Italy during 2015, with the country lagging behind as growth accelerates more acutely across the single currency region. Furthermore, poor labour market developments could offset the favourable external backdrop, extinguishing the recovery spark in Italy during 2015. Such an outcome would bring to even sharper focus on the structural impediments sitting on Italy’s growth potential, and ramp up the pressure on the country to deepen its reform drive.
“In addition, Italy will struggle to resort to further consumer and business tax cuts, after Italy’s constitutional court decision to overturn certain aspects of 2012 pension reform will require the government to pay out an additional €2 billion to pensioners in August 2015 (with more to follow).
“Despite a disappointing first quarter performance, the rise in consumer confidence since the latter stages of 2014 provides some hope of a firmer outlook for household spending, but the pace of recovery is likely to be weaker than previously anticipated. The key factor will be lower global crude-oil prices and income tax cuts triggering positive real income effects.
“A key support will be negligible inflation developments helping to boost household purchasing power, while consumer confidence in March climbed to the highest level since mid-2002. Specifically, marginal negligible inflation developments from June 2014 and income tax cuts have been welcomed by squeezed households who endured their real disposable income falling for a sixth successive year by 2013 (and to stand 10% below when compared to the previous peak in 2009).
“We expect consumers to be better placed to raise their spending levels during 2015 and 2016, increasingly attracted by generous pricing and boosted by recovering real incomes (accentuated further by income tax cuts from 2015). Nevertheless, we expect consumer spending to gather limited momentum during 2015 and 2016, with some households to choosing to save more.
“The main limiting factor will be households remaining guarded about spending on nonessential items, as Italy just about clambered out of recession in late 2014, while unemployment remains higher than normal and credit markets remain dysfunctional.
According to a final estimate from the Statistics Bureau, seasonally and calendar-adjusted real GDP rose by 0.3% between the fourth and first quarters after the economy staggered out of a short-lived technical recession at end-2014. The annual comparison remained weak, with real GDP up by just 0.1% y/y, but was still the best performance since the third quarter of 2011.
The Statistics Bureau revealed more detail about first-quarter GDP in terms of expenditure, suggesting that domestic spending provided a positive contribution, but this was a lopsided outcome with transport investment and change in inventories providing the largest contributions to growth. Worryingly, both consumer spending and machinery and equipment investment continued to slide in early 2015 despite households and firms reporting strong confidence during the first quarter, and illustrates the major recovery challenges facing Italy. Positive real income effects failed to spark stronger consumer spending in the first quarter, suggesting households remain cautious in line with still poor labour market developments, and are probably saving more. In addition, the weak euro and firmer demand across the Eurozone failed to spark a rise in Italian exports in the first quarter.
“Despite the welcome and anticipated resumption of growth in early 2015, it was still poor return from extremely supportive external factors, and continued to highlight long-standing structural impediments to stronger economic activity. More promising survey data, alongside improving PMI data for both manufacturers and service providers had signalled a resumption of growth in the first quarter of 2015 after the economy staggered out of a short-lived technical recession in the latter stages of 2014. But the contributions to growth were disappointing, suggesting Italy failed to take full advantage of supportive external factors, namely the sharp fall in global crude-oil prices and the slide in the euro. However, we still expect the economy to receive a boost from the prospect of low crude-oil prices during the next few years. Specifically, IHS now expects average Brent prices to be limited to USD54.5/barrel in 2015 and USD65.5/barrel in 2016. This environment should lift consumers’ purchasing power and also significantly help companies’ margins, which will support investment and employment. In addition, sustained low oil prices should be beneficial overall to the global economy, which will help Italian exports.