RaboResearch - Economic Research

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Italy: consumption an important driver of moderate recovery

Economic Update

  • The Italian economy will return to growth in 2015 for the first time in three years, to ¾%
  • Growth will accelerate further in 2016 to 1¼%
  • Domestic demand is again making a positive contribution to economic growth
  • Unemployment remains high and stands in the way of a more powerful recovery

Economy returns to growth

Italy appears to have finally emerged from the longest recession in the country's history. The economy grew 0.4% compared to the previous year in the first half of 2015. While this is not yet really convincing, we do expect the economic recovery to continue. For this year, we expect the economy to grow by ¾% – the first growth since 2011 – and we expect a slight acceleration to 1¼% in 2016 (table 1).

Table 1: Forecast table Italy
Table 1: Forecast table ItalySource: Macrobond, Rabobank

Both domestic and foreign demand will increase this year and next. The recovery is supported mainly by lower commodity prices, the weak euro and accelerating growth in the country’s major trading partners. Growth will be slowed by high unemployment, high government debt, strict credit conditions, the very scarce availability of credit and a relatively weak competitiveness.

Consumption is an important driver…

Unlike last year, domestic demand will be an important contributor to growth this year and next. It is mainly private consumption that is driving growth, although the recovery is still weak.

Low inflation is boosting household purchasing power

Higher household purchasing power is the first factor underpinning the growth in consumption. Nominal wages have risen faster than prices this year owing low inflation (0.4% in August; figure 1), even though wage growth is very low (1.2% in July; figure 1). The low inflation is mostly results from low commodity prices. The prices of many other products have also risen very little as retailers try to attract customers with big discounts. Since households are benefiting from lower prices at the pump and lower energy bills, they have more money available for other products. The big discounts on offer might also tempt consumers to purchase luxury items.

Tax cuts

Another factor boosting private consumption is the reduction of household tax bills next year. The government has announced that it will lower income tax in 2016 and that it will scrap the property tax on first homes. The extent to which these measures will affect economic growth depends to a great extent on the effect they have on sentiment. The scale of the cuts will be limited, as the government’s high debt level gives little room in the budget for largesse. There is also a strong chance that the government will have to introduce other austerity measures to pay for the tax cuts.

Figure 1: Wages still rising in real terms
Figure 1: Wages still rising in real termsSource: Macrobond
Figure 2: Recovery in the labour market has a long way to go
Figure 2: Recovery in the labour market has a long way to goSource: Macrobond

… But the recovery in consumption is far from strong

Although higher consumption is making an important contribution to the economic recovery, there will be no strong growth in consumption either this year or next. This is mainly because the labour market is still in the doldrums, the boost coming from lower commodity prices will be less next year and consumers are cautious.

While unemployment has recently fallen to a two-year low (12% in July), it is still high in historical perspective (figure 2). We expect unemployment to decline slightly this year and next as job opportunities will increase somewhat more than the labour supply. However, in our opinion the growth in employment will not be enough to generate strong wage growth. Combined with rising inflation, this probably means that wage growth will weaken next year in real terms.

While very high consumer confidence boosts higher consumption, surveys are indicating that consumers still prefer not to make any large-scale acquisitions at this time. There are still doubts lurking in the background as to whether the economic tide has really turned. We therefore expect households to save a significant part of their additional real disposable income, certainly this year. We do however also expect that the positive development of sentiment will continue, and that this will probably lead to lower propensity to save and higher consumption next year. Even to the extent of dipping into savings.

Based on the above factors, we foresee subdued private consumption growth this year and next.


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