For Paolo Pizzoli, Senior Economist of ING, despite the uncertainty, Italy can avoid the recession for two factors, i tourist flows and NextGenEu investments.
“The deterioration has not yet overcome the impact of the government crisis. Further weakening is expected, but thanks to NextGenEU investments and good tourist flows, Italy it may be able to avoid a contraction of GDP in the third quarter of 2022, ”Pizzoli writes in a note commenting on today’s data on consumer confidence, which fell to 94.8 in July, to its lowest level since May 2020.
Confidence deteriorated even before the government crisis
According to Pizzoli, the deterioration of the general macro picture is increasingly reflected in the data on confidence. If up to June the Italian data indicated a relative stability in the confidence climate of companies compared to the main European countries, in July the data worsened unequivocally in all sectors, with the exception of manufacturers and retailers. Note that the data was collected before the government crisis materialized.
Consumers continue to suffer
In addition, ING’s Senior Economist points out that consumers will continue to suffer from continued rise in inflation, “The decline in consumer confidence is not surprising. The index lost nearly four points in the month, registering its lowest level since May 2020. Consumers are increasingly gloomy about Italy’s economic outlook and the financial conditions of their families, and see fewer opportunities to save in the future. Furthermore, unemployment prospects are increasingly seen as a problem. The impact of rising inflation on real disposable income is clearly heavy and will likely manifest itself in a weak third quarter consumption data. “
The construction sector is still driven by EU funding and generous tax incentives
On the business front, according to ING, the manufacturing sector marks a change from the recent past. Italian manufacturers had proven to be more resilient than their Eurozone counterparts to supply chain disruptions, thanks to discreet backlog fill. In July, the orders component weakened across all sectors, including capital goods which benefited from the NextGenEU effect. As stocks of finished products are slowly running out, for the moment Italian producers are only marginally revising their production plans.
The effect NextGenEU and generous tax incentives continue to work at full speed in the construction sector. Here, confidence began to rise again, driven by the increase in orders and employment expectations. As the incentives remain fully in place for the remainder of 2022, we expect the construction sector to remain a growth engine for the remainder of the year.
Services down, but tourism supports economic activity
For ING in June we noticed the increase in trust registered in services. That gain was almost completely lost in July, due to a sharp decline in transport and warehousing and business services, possibly due to developments in the manufacturing sector. However, the tourism sector appears to be doing better, supported by good orders. For the moment, the available data seem to support ING’s opinion that tourism could temporarily support Italian economic activity during the third quarter of 2022, helping to avoid a quarterly contraction.
ING expects GDP at + 2.9% in 2022 despite the uncertainty
Overall, according to ING, the confidence data released today suggest that Italy is not immune from negative external developments, and in particular from the consequences of high inflation. The third quarter promises to be weaker than the second, but the joint effect of NextGenEU investments and one good tourist season it should help avoid a quarterly contraction, which is likely to materialize in the fourth quarter of 2o22, accentuated by political uncertainty. Currently, ING estimates GDP growth in 2022 al 2,9%but political developments make this prediction increasingly uncertain.