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Economy in Brief

Italian Confidence Makes Small Bounce in May; Is It a Signal or Is It Noise?
by Robert Brusca  May 26, 2022

Italian business and consumer confidence indexes both are substantially lower in May than in February before the Russia invasion of Ukraine occurred. Both business and consumer confidence eroded in March and in April; business confidence eroded further in May but consumer confidence in Italy has rebounded in May. This is a different pattern from what we've seen in Germany where confidence fell very sharply in May after more gradual erosion. The confidence figures for Italy also have much higher standings than those for Germany, indicating that Italy is showing less anxiety over the ongoing conflict and may be impacted less by adverse economic forces.

Confidence and survey metric standings
The percentile standing for consumer confidence in May is at its 51.1 percentile. For business confidence, it is at the 79.7 percentile, a much higher and even firm standing. Consumer confidence is barely above its median reading; the median occurs, of course, at a ranking of the 50th percentile. And while consumer confidence is above its median in Italy, it is below its mean.

The components for confidence show us conflicted patterns. The percentile standing for the overall situation over the last 12 months is placed at 51.1%. However, over the next 12 months, the overall situation has a ranking at the 18th percentile, a much lower the expectation. For unemployment over the next 12 months, there is a 71.8 percentile standing, an extremely high reading. Household budgets for the period ahead are assessed in the 73rd percentile, a firm standing for that variable.

We see the same dichotomy in our assessment of the household financial situation with the last 12 months assessed barely above the median value at a 50.5% while the standing for the next 12 months at a 5.6 percentile standing. The future clearly is a matter of concern for in households. However, the assessments for savings in the current and future periods are roughly the same with rankings in the mid to upper 80th percentile for both. The current environment for making a major purchase has a 59% outstanding, slightly firmer than the assessment of the overall situation or for confidence overall - but that is still a relatively modest reading.

Changes since February
The changes in the readings versus their levels in February show deterioration in almost all cases. The prospect for unemployment, for example, is up by 9 points; the overall situation of the past 12 months is 24 points worse while the overall situation over the next 12 months is assessed as 31 points worse. The household financial situation over the previous 12 months is 3 points worse while the assessment for the next 12 months is 17 points worse. Household savings is the lone exception to the worsening trend with the current reading 2 points better, but the future reading follows a familiar pattern and is three points worse. The environment for making major purchases in May is 12 points worse than it was back in February.

Tying things together
The standing rankings in some cases are still relatively firm; yet, the outlook for unemployment is dismal and then the reduction in readings between February and May is striking and consistent. The pick-up in the readings between April and May is a curiosity and will have to be watched to see if there's any reason for it or whether it's a part of normal volatility. However, an increase of 2.7 points in consumer confidence month-to-month is a significant improvement and should have some rationale behind it.

Italy is different...unique
One interesting aspect is the much higher standing for business confidence and although business confidence does continue to erode across this entire period it is eroding at an extremely slow pace. Also, Italy has a large Communist Party, and many Italian politicians see a kinship with Russia. When Ukrainian President Zelensky addressed the Italian parliament in March, an estimated one-in-three Italian parliamentarians did not attend (Source here). It's unclear whether these relationships have anything to do with the overall better retention of consumer confidence levels in Italy than in Germany for example.

Are cross-country differences real or induced by different surveys?
Some of the apparent differences in national confidence may be in the design of the confidence measures themselves. The German GfK survey is quite different from the Italian survey conducted by ISAE. One reason to believe this is that the EU Commission consumer climate measures allows us to compare readings for April, and they show that, ranked on a similar survey and period, Germany has an 8.9 percentile ranking while Italy has a 10.3 percentile ranking, Spain has an 11.1, percentile ranking while France has a 3.9 percentile ranking. On this scheme, the rankings for Germany and Italy are quite similar at least through the month of April. We can also look at the changes in these readings from February to April: in terms of changes the German climate measure falls by 12.7 points, while the Italian measure falls by 11 points, the Spanish figure falls by 16.5, points and the rating for France falls by 10.5 points. On balance, when the same survey technique is applied to Italy and Germany on the same timeline, confidence no longer seems to be so different.

However, the Italian survey is still food for thought. It does show more concern across the consumer sector than in the business sector. It does show significant deterioration from February to May. It raises some question as to why consumer confidence improved in May. This will be something to continue to watch.

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