Italian Consumer Confidence Ramps Up

Italian consumer confidence has moved up sharply and unexpectedly in April. The index that measures confidence jumped to 105.4 in April from 101.9 in March. The index now sits above its average reading of 104 and is positioned in the 63rd percentile of its historic queue. Confidence now lies north of its median and its average. These are good developments for Italy. They also are unexpected as the outlook for confidence this month was that it would drop.

The overall situation assessed over the last 12 months improved in April with its reading rising to -96 from -114 in March. The -96 reading is in the 43rd percentile of its historic queue, still on the weak side. The overall situation for the next 12 months improved, posting a reading of 28 in April, up from 23 in March. This reading is the highest in the survey since February 1997 and the fourth highest overall going back to 1982. That is not only impressive, but it's hard to believe. The prospect for unemployment backed off to a reading of -3 in April from 2 in March; it has a low 33rd percentile standing which is good news. The expected state of the household budget improved to -15 from -21, but that is still a bottom 11th percentile standing in its historic queue.

The household financial situation in the previous 12-months is assessed as in the 18th percentile of its historic queue while the expected situation in the next 12-months is in the 52.7 percentile, a dramatic turnaround. Of course Italy has just enacted a program of tax cuts and that may be having a positive effect on expectations.

The environment for making a major purchase has improved slightly in April to -38 from -41 to move up to a 65th percentile standing.

On balance, this is a huge move in Italian confidence and one that was wholly unexpected in April. Last month the confidence reading produced a large gain as well; in the two months together the changes in April and in March constitute the fourth highest two-month gain the history of this consumer confidence index which extends back to mid-1990s. The chart shows the dramatic nature of the turnaround in confidence.

Italian confidence is now back to a level that is consistent with its levels prior to the financial crisis. This is such a surprising and strong development that we will want to watch it in the coming months to see if it holds up. On the other hand, there has been creeping progress on growth in the European Monetary Union. Although there continue to be challenges and backtracking for the euro area as a whole, on balance Europe appears making progress and Italy appears to be sharing in that as well. Such strong and quickly received signals of improvement may also be due to the recently enacted tax cuts that were especially targeted to help low-income Italians. This fiscal tool may have had an outsized impact on the consumer confidence responses this month. The question is whether they will have staying power.