Econintersect: The signal based on business confidence is not yet as strong as for the Great Recession, but a reliable GDP advance indicator is giving a 
strong warning of recession for the coming three quarters in Italy. The manufacturing sentiment index compiled by Istat, a national statistics institute in Rome, dropped to 89.5 for April, down from a downward revised 91.5 in March (was estimated at 92.1 at the end of march) and well below the consensus estimate of 92.1, according to a report from Bloomberg. The Italian government has a new, lower GDP estimate for the year – down 1.2%. The government is implementing a €20 billion ($26.4 billion) austerity plan designed to eliminate the nation’s fiscal deficit. Some economists have questioned whether tax revenues might fall faster than spending under the plan. Click on picture for large view of the Colloseum.
Consumer confidence in Italy is falling also. Another Bloomberg report (23 April 2012) reports that Istat consumer confidence index for April plummeted 7.3 points to 89 from a downwardly revised March 96.3. Unemployment in Italy is 9.3%, an eleven-year high, and is expected to rise from that level into next year.
Some economists are hedging their bets as indicated by the following excerpt from Bloomberg:
“It is premature to say whether today’s decline in business sentiment might be a temporary blip or a signal of a more protracted phase of very weak economic activity,”Unicredit economists Chiara Corsa and Loredana Federico wrote in a note today. “Still, taken at face value the April figure is consistent with a GDP contraction at the beginning of the second quarter.”
Others are not hedging much as the following excerpt from Reuters indicates, specifically citing austerity:
“Italian austerity is hurting domestic demand, and austerity in the rest of Europe is hurting exports,” said Paolo Pizzoli, senior economist at ING Financial Markets in Milan.
Last year, 57 percent of Italian exports were to European Union partners, Pizzoli said.
Initial lukewarm support for the austerity plans has eroded severely. Confidence in the government fell to 45% in April, down from 55% in January.
The significance of the current business confidence readings is easily inferred from the following graph:
According to Reuters, analysts expect four quarters of recession, 2Q/2012 through 1Q/2013.
Sources:
- Italian Business Confidence Drops to Lowest Level in Two Years (Lorenzo Totaro and Chiara Vasarri, Bloomberg, 26 April 2012)
- Italian Business Confidence Rises After Labor Reform (Chiara Vasarri, Bloomberg, 28 March 2012)
- Italian business morale falls as austerity hits (Steve Scherer, Reuters, 26 April 2012)
- Italian Consumer Confidence Plunges to record Low in April (Lorenzo Totara and Chiara Vasarri, Bloomberg, 23 April 2012)
Hat tip to Roger Erickson.
