Italian September Consumer Confidence Up, Business Confidence Down As Government Revises Economic Outlook Down

Italian consumer confidence ticked up again in September for a second consecutive month, while business confidence fell to its lowest level in lamost seven years and eurozone purchasing managers indexes suggests the zone as a whole may well now be in recession. To cap it all, both the Italian government and Confindustria have this week revised down their 2008 growth forecasts.


Consumer Confidence Rises

The Rome-based Isae Institute's Consumer Confidence index, which is calculated on the basis of a survey of 2,000 families, increased to 102.8 from a revised 99.6 in August. This is the second consecutive month in which the index has risen, and does suggest Italian consumers are feeling a little better about something, possibly the easing back in oil prices. The level however still remains low - and has been slightly worse over the third quarter as a whole than it was during the second quarter of 2008, when, of course, the Italian economy was contracting.

Crude oil prices - despite showing a certain volatility during the financial crisis of recent days- has now dropped by around 27 percent since the record high of $147.27 a barrel reached on July 11, and this move in prices seems to be reflected in the fact the ISAE survey found that households are less concerned that inflation will accelerate further. The sub component measuring expectations for price rises over the coming 12 months fell to 6 from 8, while the component which reflects household sentiment concerning their ability to save money for the future rose to minus 63 from minus 80.


Business Confidence Falls

On the other hand the Isae Institute's business confidence index dropped to 82.7 in September from 83.5 in August. That is the lowest since October 2001.





Among Italian businesses, exporters were the most pessimistic. The index sub component measuring optimism about orders from overseas dropped to minus 21 from minus 10 as stockpiles grow from the drop in demand. The euro, after falling from a record in July, has recently been on the rise again, and has gained 4 percent since Sept. 16 as global credit markets have been steadily seizing up, while confidence in the ability of the proposed $700 billion bank bailout to do the trick has been faltering.

Eurozone Now In Recession?

The eurozone seems now to have definitively fallen into recession, with a decline in manufacturing output leading the national economies down. Private sector output in the 15-country region contracted in September for the fourth consecutive month, according to the flash readings on the eurozone purchasing managers’ indices. The pace of decline has been the most rapid since the one which occured in the aftermath of the September 2001 terrorist attacks in the US. The eurozone composite purchasing managers’ index – covering services as well as manufacturing – fell from 48.2 in August to 47 this month. The manufacturing index fell to 45.3 this month, down from 47.6 in August, while the services index fell to 48.2 from 48.5. Any reading below 50 indicates a contraction in activity.

Government Forcecast Down

Growth in the Italian economy has now lagged behind the European Union average for more than a decade and is set to be the slowest in the euro region this year, according to the European Commission forecast issued on Sept. 10. According to a Confindustria forecast issued last week, the Italian economy will contract 0.1 percent in 2008. If the prognosis is realised this will be the first annual contraction in the Italian economy in 15 years, and only the third annual recession since WWII (the others were in 1975 and 1993). In fact this is even worse than I was (I thought) pessimistically predicting at the start of this year on this blog, and in fact the outlook for next year would seem to be worse not better.

The Italian government has also cut its 2008 economic-growth forecast this week, but they continue to cling on to the hope that the economy may expand, however slightly. The government suggest gross domestic product will increase 0.1 percent this year, down from the 0.5 percent predicted on June 24.

The forecast was made public just as Finance Minister Giulio Tremonti prepared to announce spending for the 2009 budget which was submitted this week to the Italian Parliament. The three-year spending proposal, which attempts to maintain the objective of balancing the budget by 2011, incorporates 10.4 billion euros ($15.3 billion) in cost cuts and savings for 2009, which rising to 17.2 billion euros in 2010 and 31.2 billion euros in 2011 in the hope that Italy will be able to balance the budget by that year. Tremonti has indicated that Italy's fiscal deficit will deteriorate slightly to 2.5 percent of GDP this year from 1.9 percent last year, but has asserted that in 2009, the budget shortfall will drop to 2.1 percent (although this is based on a government forecast of 0.5% GDP growth in 2009 which may well not be achieved).

Clearly this attempt to stay on course for a reduction in the level of Italian government debt is a laudable objective given the risk that any slippage will result in downgrading of Italian sovereign debt by the rating agencies, but it will be a very hard medicine for Italian citizens to swallow, since it will mean that the fiscal stance will be towards contraction at just the time when global credit conditions may remain tight and oil may stay over $100 in the mid term, in which case it is hard to see how 2008s negative growth will not be followed by more of the same in 2009, and ditto in 2010. This at least is the big risk as I see it.