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.

Italian Industrial Output Falls Again In July

Italian industrial production declined again in July as economic growth remained between flat and non-existent and high oil prices increased costs and sapped consumer spending. Output was down 1.1 percent from June , following a revised decline of 0.2 percent in June, according to data from the national statistics office ISTAT earlier today.



Italian output has now declined on a year on year basis in 8 of the last 10 months, and if we look at the seasonally adjusted index, we will see that output touched a peak in December 2006, and has been steadily falling since.



Italian consumer spending and exports both declined in the second quarter, and as a result gross domestic product contracted making it very likely that Italy entered formally entered recession on 1 April 2008. The July industrial output data only serves to confirm this impression, although we should note that the price of oil hit a record $147.27 in July but has since fallen almost constinuously.

Fiat registered a 23 percent drop in car sales in Italy in August, so it is not clear that any relief is imminent. Although if we look forward to the August PMI data we have, Italy's manufacturing sector probably contracted for the sixth successive month in August, although perhaps it did so at a slightly slower pace than had been the case in the previous two months. The Markit Economics Purchasing Managers Index rose to 47.1 from July's 45.3, but still remained significantly below the 50 divide which separates growth from contraction.

Italian Industry Contracts More Slowly In August While Business Confidence Hugs The Bottom

Italy's manufacturing sector contracted for the sixth successive month in August, although it did so at a slightly slower pace than had been the case in the previous two months. However the outlook for Q3 GDP does not look any too promising, given the back-to-back contraction we have seen in July and August. The Markit Economics Purchasing Managers Index rose to 47.1 from July's 45.3, remaining clearly below the 50 divide between growth and contraction.

August data revealed falls in new orders, output and employment as manufacturers struggled in the face of a weak domestic economy," the Markit/Adaci report said. Economy Minister Giulio Tremonti has already said growth will be "around zero" this year, below the official government target of 0.5 percent, but pretty realistic as far as can be seen at this point. It all depends on Q4 , since the downside risk is that Q4 gives a bad result which puts whole year 2008 into negative territory.

The PMI survey showed that while the rate of decline in new orders, output and employment was slower than in recent months, the quantity of purchases fell at the fastest rate since November 2001, shortly after the attacks on the U.S. World Trade Center. Input price inflation eased to its slowest rate since May and output prices showed the slowest rate of increase since December last year.


Business Confidence Refuses To Budge

Unlike Consumer Confidence which rose slightly in August, Italian business confidence held stubbornly at its lowest level since the Sept. 11 terrorist attacks as the risk of recession and slumping consumer demand kept a tight grip on optimism among Italian manufacturers. The Isae Institute's business confidence index held at 83.5, matching last month which was the lowest reading since October 2001. And while some components rose slightly in August, others fell, including the all important the production outlook, which continued its decline, falling to 1 in August after slipping to 5 in the previous month. Which means, the PMI for September may very well offer us even more contraction.

Have We Seen "Peak" Italian Retail Sales?

Well, since Ugo Bardi recently raised the question of whether Italy had not in fact passed its own historical "peak oil" and "peak mafia" points, I thought it might be interesting to ask what else has peaked in Italy, and what better place to start than with retail sales?

Sharp Drop In June Sales

Italian retail sales fell sharply in June, posting their sharpest drop on the year in more than three years, as sales fell across the board, according to data last week from the national statistics office Istat, but what many observers seem to fail to be taking note of is that Italian retail sales have been dropping steadily for some years now. Even more importantly - as will be argued in this post - there are serious theoretical grounds (in the context of Italy's ageing population problem) for postulating that Italy's retail sales may NEVER rebound again on more than a conjunctural basis, that is we may see local "peaks" and "troughs" but the secular decline may now not reverse. This is a point which most of consensus analysts who look to a cyclically driven "rebound" in domestic consumption appear to fail to take into account.

But before going further with this point, let's take a look at some data. Compared with June 2007, Italian retail sales fell by 3.4% on a current price (ie non inflation corrected basis), thus registering the steepest decline since April 2005, following a 0.5% rise in May. But since annual consumer price inflation stood at a 4% in June, retail sales in real terms declined very sharply indeed in June (more or less comparable to Spain).

ISTAT put it like this:

Per una migliore interpretazione degli indicatori qui presentati occorre considerare che essi si riferiscono al valore corrente delle vendite e incorporano, quindi, la dinamica sia delle quantità sia dei prezzi.

(Which loosely translated say that in order to better understand the data it is important to bear in mind that it refers to the current price value of sales and thus incorporates both the volume and the price dynamic. Of course, to help us better understand the data it would be nice if ISTAT could provide us with some price corrected index, but in the absence of this I have prepared a rough and ready one, but deflating the seasonally adjusted index with the CPI one, thus reducing the sales index to 1995 prices, see charts which follow).





Slight Improvement In The Rate Of Contraction In The August PMI

Now applying the CPI deflator to the index in fact gives us reading which match quite closely the Bloomberg PMI data for retail sales. The latest Bloomberg eurozone Purchasing Managers' Index, based on a mid-month survey of economic conditions in the euro area retail sector, pointed to a continuing contraction in retail sales across the eurozone for the third consecutive month in August. While the PMI rose to a three-month high of 47.7 it remains below the crucial 50.0 zero growth mark.




There was some, however, some variance in retail sales trends across the three largest euro area economies. Italian sales continued to fall, extending the current period of month on month consecutive declines to a year-and-a-half. However we did hit a nine month "high" with sales contracting at the slowest pace since last November, rising to 44.8 (or minus 5.2) from 38.2 (or minus 11.8). Thus August revealed a significant eeasing in the rate of contraction (a finding which is completely in harmony with the rather better consumer confidence index reading for August. Indeed the fall in Italian retail sales in August was not as strong as the one in Germany, where the rate of decline - 44.1 - accelerated to its strongest pace so far this year. So things in Italy are bad, and they are getting worse, but they are now getting worse more slowly than they were. The fact that in August oil prices were significantly down from the July peak obviously has something to do with this situation.

The August PMI data also revealed a rather higher level of pessimism amongst retailers with regard to September sales, with the index for the sales outlook registering 48.0, down from 49.5. The data revealed some variance across countries, while French and Italian retailers expect sales to come in below target next month, which reflects underlying concerns that the economic downturn will continue, German retailers were more positive, forecasting a stronger than previously expected performance.

Indeed Italian consumer confidence bounced back in August from a 15-year low in July as oil prices fell from record highs. The Rome-based Isae Institute's index, calculated from a survey of 2,000 families, rose to 99.5 from 95.8 in July. The index, however, continues to remain at a very low level.




"Peak" Retail Sales

So the question we are faced with now, is whether or not we are faced with a "peak" retail sales phenomenon? The theoretical basis for this assumption is on reasonably solid ground, and there is evidence to show the phenomenon exists in other ageing economies (Germany, Hungary, possibly Japan). In the Italian case, I have constructed my own makeshift index, and the performance of this index since 2003 can be seen below. It seems Italian retail sales may have "peaked" in early 2003, and since that time the decline has been continuous, although sales did stabilise during 2005 and 2006 (I will come to this point later).




Now Italy's population is not in fact contracting at this point, although the natural population change is negative, and has been since 1993. But Italy has been receiving immigrants - an estimated 450,000 in 2007 - and thus Italy's population is still increasing.



But Italy's population is ageing, and we know from basic life cycle theory (Modigliani) that saving and spending patterns change across the life cycle, with the propensity to borrow against future income in order to buy now declining significantly among the over 50s, and since it is increasing consumer credit that drives retail sales growth in the dyamic internal consumption economies, then it is highly likely that ageing will now act as a drag on sales growth in countries like Italy with very high median population ages (43, along with Germany and Japan). As we can see in the chart below (which comes from the US Census Bureau database), Italy's median population age has been rising steadily, and at a very rapid rate (over 1 year's increase in median population age for each calendar year, of course historically this type of rapid ageing is quite unprecedented), with the only real substantial unknowns between now and 2020 being life expectancy, which may accelerate more than anticipated (in which case the population ageing will be even more rapid), and immigration, which will slow ageing down a bit.

The data in the above chart come from the US Census Bureau, and it appears to me they have only made a very slight allowance for the impact of migration, which may mean that the ageing curve has not been so steep in the last three or four years, but equally, and despite the fact that population has risen by nearly 2 million since 2003 due to substantial immigration, the retail sales have barely shown an impact (which means I would hate to see what they would have looked like without the immigants). Although, might we postulate the some of the stability we saw in retail sales in 2005 and 2006 could be the impact of the arrival of the immigrants?


EU Sentiment Index Down In August

Other indicators also seem to confirm the idea that things in Italy continued to get worse more slowly in Italy in August, one of these was the EU Economic Sentiment Indicator (ESI) which fell in both the Eurozone and EU, falling by 1.9 points in the EU and by 0.7 of a point in the Eurozone, to 86.9 and 88.8 respectively. For the EU as a whole the ESI reached its lowest level since December 1993. However, unsurprisingly, perhaps, in view of all the above, while the ESI fell for the zone as a whole in August, in Italy it bounced back slightly to 89.5 from July's 85.4 low.


One of the reasons for this change is undoubtedly the shift in consumer confidence, and one of the underlying reasons for this shift in consumer confidence is the easing in petrol prices and inflation, which fell back to an annual 4% in August from an annual 4.1% in July.

It is to be hoped that producer prices, which were up at their highest rate since September 1995 in July - an annual 8.3% - will now follow the same path. There is some evidence of a moderating trend, since month on month, the index rose 0.5% over June compared with a 0.8% increase the previous month.


Istat said that energy prices in July surged 25% on the year and 1.6% on the month. The price of refined petroleum products continued to drive the index higher year-on-year, since they were up by an annual 31.1% and 1.2% on the month. Excluding energy, producer prices only rose 4.1% on the year and 0.1% on the month in July.

So is it all about energy, well obviously not completely, but it is to some significant extent. Years of declining competitiveness and a complete disregard for the problems that population ageing were going to represent have left the Italian economy completely "groggy", like the proverbial boxer leaning on the ropes, waiting for the knock-out blow. And in it has come, in the shape of an unprecedented and sharp spike in oil prices. Italy is now, as we can see, extremely sensitive to any strongish movement, one way or the other, in oil prices. Thus it seems it may well be worth asking ourselves, along with Professor Bardi, the awkward question of whether Italy's economy can in fact learn to live with oil prices which remain over $100 a barrel in the longer term? The answer is not at all obvious.

An airline is a small economic system that uses fuel derived from oil in
order to carry on activities that generate profits. If oil is too expensive,
profits disappear and, eventually, the system must disappear, too, bankrupted.
Low cost airlines have appeared during the period of relatively low oil prices
that ensued after the first oil crisis, in the 1980s. Can these airlines exist
with oil over $100 per barrel?

A country is larger than an airline but it, too, needs fuel for its
economic activities. And, if deficits run too high, countries can go bankrupt as
well. Italy's industrial economy had its moment of maximum growth in the 1950s
and 1960s; in a period of low and stable oil prices. Can Italy's industry exist
with oil prices over $100 per barrel?