Confindustria: Italy still growing, but slowing down. On the extra profits of companies: there are, but less than in the rest of Europe

Italy still growing, but “moderate” in the second quarter. It is a response to the theme of “profit” inflation, i.e. to the theme raised by the ECB of prices for final consumers which have risen more than those for production, generating margins for businesses: in Italy it is a less stronger than elsewhere.

In the Flash Conjuncture of the Confindustria Study Center it is said that Italy’s growth continues in the second quarter but at a more moderate pace, driven by services, while the situation of industry and construction is less solid. Inflation is persistent as expected, interest rates go up and loans go down. Mixed signals are coming from consumption, while investments are growing, even if only slightly. In general, there is weakness on the Eurozone front, while industry is picking up again in the USA. China slows down, India grows.

In the detail of the survey of viale dell’Astronomia it is said that the 2nd quarter of 2023 opened with some weak signals for Italy, after the good performance of the GDP at the beginning of the year. The situation is solid in services, less so in industry and construction. The drop in the price of gas is a powerful positive boost, but consumption remains weighed down by inflation, investments by the cost of credit and exports have stopped, given the global slowdown.

Italian inflation stopped its decline in April (+8.2% annually, from +7.6%), but the downward trend will continue, thanks to the increasingly decreasing gas price (34 euro/mWh in May ) and to the increasingly full effects of the rate hike. Consumer food prices remain in tension (+11.8%), but they too will gradually cool down because raw materials are expensive but without further increases (in April +49% from 2019). The trend in consumer prices of core goods and services continues to rise (+4.9%), incorporating past energy price increases.

As regards loans, the rate paid by Italian companies jumped to 4.30% in March, more than three times the level at the end of 2021 (1.18%). Credit under much more onerous conditions means that the stock of business loans is shrinking more and more (-1% per year in March): therefore, there is a lack of support for production and investments, reports Confindustria.

THE services they drive growth, with tourism in Italy in the 1st quarter which rose above the levels of 2022 (+30.7% spending by foreign travelers), reaching around those of 2019. In April, the PMI for services rose even more, indicating strong growth (57.6 from 55.7), even though business confidence declined in May. The sector is still benefiting from pent-up household demand freed up by post-Covid reopenings. on the front ofindustry, production decreased again in March (-0.6%), the third consecutive decline, but closed the 1st quarter only slightly negative (-0.1%) thanks to the good legacy of December. However, the scenario is worsening: in April the PMI suddenly collapsed into a contraction area (46.8 from 51.1). In May, business confidence dropped again: fewer orders, lower production expectations. Foreign demand is no longer strong: Italian exports of goods stopped, on average, in the 1st quarter of 2023.

Come on consume mixed signals are coming. In March, the decline in sales of foodstuffs continued (-0.7%, in volume), while car registrations resumed from the beginning of the year, thanks to favorable demand after many months of contraction (+9.7% in first 4 months). A positive factor is the labor market which continued to expand in the 1st quarter (+80,000 employed). For April, however, the ICC reports a slight growth in consumption (+0.2% per annum), driven only by services (+4.5%). And in May, households’ assessments of their economic situation worsened a bit, as did confidence in general. The investments they grow, even if little, in a scenario of weakness in the Eurozone. Industrial production in the euro area slips in March (-4.1%), bringing the 1st quarter down (-0.2%). In particular, manufacturing is down (-0.7% in the 1st), which remains below the values ​​of the beginning of 2021: since then, the gap in Italy has been slightly positive (+0.1%), but the gap accumulated in Germany (-1.3%), slipped into technical recession. In April, the manufacturing PMI fell to 44.6, indicating a major slowdown, offset by growth in services.

“Profit-driven” inflation

In a box on the Conjuncture, the Study Center responds to the ECB’s observations for which “with the energy shock in 2022, the profits of European companies, usually pro-cyclical, have increased, reflecting the selling prices that have ridden the price increases of gas and electricity, going up more than costs have gone up”.

Italian entrepreneurs respond that “for the aggregate of the Eurozone, in 2022 there was in fact a sharp increase in unit profits (+8.1% on average over 2021). In particular, they grew significantly in trade (+19.4%), in construction (+17.6%) and in the energy-extraction sectors (+43.4%).In manufacturing, unit profits rose less than in other sectors, but still significantly (+ 10.3%).In services, on the other hand, there was substantial stability (-0.4%, excluding the Public Administration).”

But they add that “in Italy it is different” is that “for the total economy, growth is much lower than in the Eurozone: +3.5% in 2022 compared to 2021. The sectors that have recorded significant increases are energy- mining and commerce (+8.0%).Conversely, in Italy both services (-2.6%) and construction (-3.8%) suffered a decline in unit profits and manufacturing saw a sharp decline (-8.1% on average in 2022), despite the recovery in the last quarter. Therefore, the thesis that the increase in profits fueled inflation does not fully apply to Italy”. And they explain that “various factors can explain the lower dynamics of margins in Italy: greater increase in energy costs; smaller size of companies, which could limit market power; greater weight of downstream sectors, in contact with compressed consumption; pricing strategies aimed at supporting volumes”.