Home » The growth of the Italian economy is slowing down, supported by services but held back by high interest rates

The growth of the Italian economy is slowing down, supported by services but held back by high interest rates

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The growth of the Italian economy is slowing down, supported by services but held back by high interest rates

Flat growth of the Italian economy, supported by services, but held back by high rates. Inflation is less high, but the Central Banks raise rates to the highest levels, and credit is in retreat because it is too expensive. In Italy, services are driven by tourism, industry is weak, construction is down. Investments are held back, consumption is uncertain, while the export of goods is declining. Germany is in a recession, according to forecasters it will be short-lived. The USA continues to grow, vice versa China risks deflation.

The Italian and international economy in brief

Slow pace. The dynamics of Italian GDP in the 2nd quarter of 2023 is estimated to be very weak, almost at a standstill, as a synthesis of the decline in industry and construction and the continuation of (moderate) growth in services. Expectations for the third are slightly more positive. The price of gas has finished its fall and is floating just above the lows, but inflation, which fell only in part, led the ECB to raise rates again, worsening credit conditions. While the foreign drive to export goods has stopped.

Returning inflation. Italian inflation continues to fall (in June +6.4% per year), thanks to gas prices just above the minimum (€32/mwh) which finally brought consumer energy prices back to a moderate pace (+2.1 %). A high trend remains on food prices (+10.7% from a peak of 12.9%) but slowing down, thanks to the stabilization of raw material prices (down in the last two months). Core prices slow down (+4.7% from +4.9%), more for goods than for services, but the process is only just beginning.

Rates at the top. In July, the FED raised the rate in the USA to 5.50%, not ruling out new hikes, but the markets consider this to be the last one. Even the ECB decided on another hike in July, to 4.25%, leaving the door open for further moves, judging inflation still too high.

Overpriced and more scarce credit. Italian companies are undergoing a continuous increase in the cost of credit (4.81% in May). This is reducing the stock of bank credit (-2.9% annually in May). The Istat and Bank of Italy surveys show a tightening of the supply criteria (costs, amounts, maturities, guarantees), a demand held back by excessive costs, a significant share of businesses that do not obtain credit (6.0%), above all because waiver due to onerous conditions (56.3%).

Services driven by tourism. The main boost in services remains tourism: spending by foreigners in Italy in May recorded a +13.2% on 2022 and passengers at the airport were above the levels of 2019 in the 2nd quarter. In June, the PMI dropped to 52 .2 (from 54.0) indicating lower growth and the RTT index confirms the slowdown; in July, service business confidence recovered to April levels.

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Weak industry. In May, production rebounded (+1.6%), but since the beginning of the year it has nevertheless contracted a lot (-1.9%; manufacturing -2.4%, with means of transport going against the trend, +3.0%). Weak prospects: in June the manufacturing PMI continued to decrease, indicating a sharp drop (43.8 from 45.9) and RTT signals a decline in turnover; in July business confidence continued to fall.

Declining construction. Construction is no longer driving industry (30% of manufacturing goods among construction consumption). Activity in the sector recorded the second consecutive drop in May (-0.7%), with -4.3% since the beginning of the year. RTT reports another sharp decline in turnover in June. Contradictory signals from building permits in the 1st quarter: the residential sector is growing, the non-residential sector is decreasing.

Curbed investments. The production of capital goods decreased in the first 5 months of 2023 (-2.6%). Qualitative data suggest that investment conditions deteriorated in the 2nd quarter (balance to -20.4 from -18.1), while business expectations on investment spending in the next 6 months improved but remain low (20 .4 from 14.9; Bank of Italy survey): the most expensive and difficult credit weighs.

Uncertain consumption. The CCI traces a reduction in spending in the 2nd quarter (-0.6% annually), a synthesis of the decline in goods and the growth in services. And in July there was a slowdown in confidence. But record temperatures could increase electricity consumption (air conditioners). Support comes from the labor market: in April-May the number of employed people increased by 0.4% on the 1st quarter (+184 thousand in the first 5 months).

Declining exports of goods. In May, the reduction in Italian exports eased (-0.3% at current prices); the strong drop in demand from EU countries weighed heavily (-1.7%) while the non-EU performance was good (+1.2%). Capital goods recorded the sharpest decline (-2.6%), after energy. Negative prospects for the coming months for foreign orders from manufacturing companies, which in July reached their lowest since January 2021 (the balance -20.6). World trade recovered only partially in May (+0.3%).

USA on the rise. In the 2nd quarter, GDP increased by +0.6%, thanks to the good performance of public and private consumption and investments. In June, production fell by -0.5%, the second consecutive drop (but +0.2% in the quarter); the PMI rose again in July (49.0 from 46.3), but remains in the contraction area. In services, on the other hand, the PMI decreased to 52.4, an expansive value in any case.

China in deflation? Manufacturing in China continues to expand but slows down and the risk of deflation is worrying, with price dynamics close to zero. Strong growth in production continues in India, while industry in Russia is threatened by the price race. The deterioration continues in Brazil, also due to high rates; the drop in inflation in June, to its lowest since 2020, may allow for easing.

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Focus of the month – Germany: recession in 2023, will it be short?

How deep is the recession? The German economy started 2023 with a -0.1% drop in GDP, after -0.4% at the end of 2022: it is undergoing its second recession in three years. In Q2, the flash estimate is flat GDP. Still more than 2 points away from pre-Covid, in 2022 it grew less than its European partners (+1.9%, against +3.5% in the Euro area).

For what reason? The inflationary shock, which reached its peak in Germany in the last part of 2022 (+11.6% in October), brought down private consumption for two consecutive quarters between the end of last year and the beginning of 2023 (-1.5 % on average). This reflects the erosion of the purchasing power of German households, despite the subsequent easing of energy prices.

Spending on goods is bad. The weakness in consumption mainly concerns goods: spending on durables decreases (-2.3% on average in the 4th quarter of 2022 and in the 1st quarter of 2023, especially at the beginning of the year), plausibly reflecting the more restrictive conditions for accessing credit ; spending on semi-durables (-2.0%) and non-durables (-2.2%) also decreased. Spending on services is also decreasing, albeit slightly (-0.3%): Germany is not very linked to tourism and does not record a strong post-pandemic rebound in this type of consumption.

Energy savings of the PA. A reduction was also recorded in public consumption in Germany, concentrated in the 1st quarter of 2023. One of the reasons is the strong savings that the German economy has managed to achieve in energy consumption in public buildings (but also in residential), favored from mild winter.

The buildings suffer. The rebound at the beginning of the year in construction investments (+3.9%), does not compensate for the three previous drops (-7.3% cumulative) and the added value of the sector remains below pre-Covid levels (-2. 1%). Orders and building permits also show a downward trend for the next few months, also due to the increase in financing costs. Furthermore, the lack of manpower weighs heavily, acting as one of the main obstacles to production, a problematic factor that is felt more strongly in Germany than in other European countries, and which in the country concerns both the construction sector and the ‘industry.

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Lights and shadows on German industry. Contrary to 2022, in the first part of 2023 German industry is holding up (+1.2% annual production in January-May), although the decline in the more energy-intensive sectors continues (-18.5% in May compared to end 2021). The German automotive sector is recovering, after the sharp decline starting in 2018 (with the dieselgate), which intensified in the pandemic years due to procurement difficulties along global supply chains. Recent signals from the PMI (down to 38.8 in July), however, do not show encouraging prospects for German manufacturing in aggregate. Which represents 22% of the country’s GDP (17% in the Eurozone): energy consumers alone are worth 3.1% (IMF, 2023).

Investments for the green transition. Germany is investing heavily in strategic and high-tech sectors: the production of batteries in the last three years has grown by over +150% (+6% in Italy). Investments, public and private, are therefore stimulated by the transition of the economy towards more sustainable production, as repeatedly announced by the German government. This could raise the growth prospects for the future.

How long will the recession last? There do not seem to be good prospects for 2023 as a whole: forecasters estimate a recession in Germany, largely already achieved (-0.3% on average the Consensus, -0.5% the Bundesbank), due to the drop in consumption of families (-1.4%). The prospects for next year are better: a moderate recovery is expected in 2024 (+1.1%, +1.2%). So, it would be a short recession.

Reflections on Italy? Germany is among the main markets for Italian goods: our companies are suppliers of various German industries, especially in the automotive sector and above all of intermediate goods; when German industry slows down, there is a negative impact on Italian production, but its stability in 2023 should avoid further negative impulses. However, the German weakness in consumption could curb the Italian GDP, affecting both our export of final goods and German tourism in Italy, which generates a strong export of services for us.

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