“The decline in industry and construction is accompanied by a setback in services. The ECB rate increases are not stopping, credit is falling together with liquidity, the cost of energy is rising again. Consumption and investments are affected, while foreign demand is lacking”, this is the picture drawn by Confindustria in the flash economic situation
“After the fall in the second quarter, Italian GDP is also estimated to be weak in the third and expectations for the fourth are no better: the decline in industry and construction is accompanied by a setback in services. The ECB rate increases do not stop , credit is falling together with liquidity, the cost of energy is rising again. Consumption and investments are affected, while foreign demand is lacking”, this is the economic picture of the country traced by Confindustria in the flash economic situation.
Italian inflation, the Confindustria analysis continues, fell to +5.3% per year in September. The core prices of goods and services are slowing down (+3.9%), while for food the moderation is still in its infancy (+8.6%) thanks to the recent decline in raw materials. Consumer energy prices are growing slightly (+1.7% per year), but in September gas and oil prices rose again (35 euros/mwh and 93 dollars per barrel). In September, the Fed kept the US rate stable at 5.50%, not ruling out further increases. The ECB, however, decided on another increase, to 4.50%, because it expects inflation to be too high and for too long, but has softened its tone on any further moves. The markets now consider further increases in the US and the Eurozone possible, but not probable, foreseeing the first cuts by 2024.
The squeeze on business credit
Thus the rise in the cost of credit continues (5.09% in July) for Italian companies and the fall in loans worsens (-4.0% per year). A growing share of businesses does not obtain credit (8.2% in September): demand is held back by conditions that are too onerous, but the stricter access criteria also have an impact. Therefore, companies’ liquidity is drying up (deposits -10.1% in one year), while delays in payments and the deterioration of old loans are increasing.
Consumption, services and industry suffer
As regards services in August, the PMI slipped to 49.8 (from 51.5) and indicated a marginal contraction for the first time in 2023 and the RTT index (CSC-TeamSystem) confirmed a moderate decline, already since July. In September, business confidence in the sector fell further. The good performance of tourism is no longer enough: in July, foreign spending in Italy was +10.0% over 2022 (+20.4% over 2019) and passengers at the airport also remained above pre-crisis volumes (+ 3.7%). The industry is suffering: in July production suffered a new fall (-0.7%; from the beginning of the year -1.9%), after the recovery in May-June (+0.2% acquired in the 3rd quarter) . For consumption, which was stable in the second quarter, there was a continuous decline in sentiment in the third. Goods remain penalized compared to services: in July fewer retail sales (-0.2% in volume) and in August the ICC notes a further decline, due to goods. After months of growth, in July the first uncertainty in the job market (-73 thousand employed): a brake on incomes.
The effect of rising rates
The rapid rise in interest rates that began last year is continuing in 2023. The effect hoped for by the ECB is a cooling of internal demand, i.e. investments and consumption (which is already observed), in an attempt to reduce inflation. For families, this occurs by increasing the cost of interest on loans, even those already in existence, in particular mortgages for the purchase of a home; this is also being associated with a brake on the disbursement of new loans. Confindustria explains further. The tightening of rates has a considerable impact, especially on families who have home mortgages. The increase in rates is +2.84 percentage points until July 2023, the stock of mortgages is 425 billion euros, of which only those with variable rates should be considered, estimated at 38% of the total (162 billion). This results in an increase in annual interest equal to +4.6 billion, in aggregate. Which weighs immediately, in 2023, given that the installments on variable mortgages are updated month by month.
The impact on families
The greater burden connected to the increase in interest is quite concentrated, because it only concerns families who bought a house with a variable mortgage, a share which is estimated at 4.9% of Italian families (1.2 million, out of 25, 6 total). That is, the extra 4.6 billion in interest in 2023 is paid only by these families, for which the higher rates correspond to +3,683 euros in interest in the year (+307 per month, a substantial increase in the installment for a family with an average residual mortgage of around 130 thousand euros). These are not necessarily poor families: in Italy renting is more common among families with lower incomes, while ownership and therefore mortgages are more common among those with higher incomes.