Expensive energy persists: the price of gas in Europe is climbing rapidly in November. Less liquidity and companies borrow at high costs
L’the Italian economy is still showing signs of a slowdown while the high energy price persists. In November, the Congiuntura Flash of Confindustria released today reveals that the price of gas in Europe is rising rapidly in November (89 euro/mWh on average, 118 the latest figure), after the sharp drop from the peaks recorded in October (72 euro medium); this trend, underlined the Confindustria analysts, reflects the alternating news on the Russian gas offer, but also the difficult and prolonged EU negotiations on a possible price cap. Oil remains expensive, but below its peaks, continuing to fluctuate around 90 dollars a barrel since September (from 123 in June): since August, world extraction has returned above slowing consumption and therefore OECD stocks are recovering.
L’record inflation and the rise in interest rates are holding back the economy at the end of 2022. According to Confindustria data, up to the 3rd quarter the Italian economy resisted the high energy price beyond expectations: in aggregate, GDP grew (+3.9% ‘acquired’ for 2022, +0.5% in summer). Expanding tourism has been the main driver. The industry continued to hold up in terms of production, in the face of very high costs, with wide heterogeneity between sectors, but the tight situation on margins is not conducive to investments.
Help comes from the (limited) decline in the prices of non-energy commodities and from government interventions to (partly) offset the energy price increases. Construction has slowed down. Total bankruptcies increased slightly. But in the 4th quarter there is a risk of a decline: the qualitative indicators are overall negative; the price of gas remains high, for too many months; the resulting inflation (+11.8% annually) erodes household income and savings and will have a negative impact on consumption; the rise in interest rates is becoming more pronounced, another drag on business costs.
There is less liquidity and companies borrow at high costs. The surge in inflation in the Eurozone (+10.6% annually), mainly due to the rise in energy and commodity prices, led the ECB to raise interest rates (to 2.00%). If, on the one hand – the Confindustria analysts point out – this could partially contain inflation (by curbing expectations on prices), it nevertheless risks worsening the scenario, at least in the short term. Impact on long-term rates. The rise in ECB rates strengthened the upward trend in sovereign rates throughout Europe (albeit with some recent reductions), which had already been underway since the beginning of the year in the wake of US Treasuries. The 10-year Bund rose to an average of 2.10% in November, from -0.31% at the end of 2021. Spreads with the Bund also widened: in Italy +1.90 in November, from +1.28 . The yield of the Italian BTP reflected these increases, reaching 4.00% in November, from 0.97% at the end of 2021.
In Italy, the Congiuntura Flash of Confindustria released today highlights again, the rate on the BTP is historically crucial for determining the cost of bank funding and, therefore, the rate that banks apply to credit for businesses (and households). Increase the cost of credit. In fact, the rise has already begun to be transferred to the rates paid by companies in Italy, which up to September increased by almost one percentage point (from 1.74% to 2.59% for SMEs; from 0.76% to 1.69% for large companies) and seem destined to rise much more. At current values, considering the renewal of loans maturing within a year and also the share of floating rate transactions (higher since 2020 than in previous years), it is estimated that the cost of credit for businesses will increase by +2.3 billion in one year, which risk becoming +6.8 billion if the rate hike fully follows that of the BTP.
The increase in credit, explains the analysis, naturally also affects Italian families: the Taeg rate for consumer credit has already risen from 8.08% to 8.83% in September, the average rate on home loans from 1.78% to 2.65%.
Liquidity erosion. The increase in credit rates adds to an already difficult situation. After the recovery of 2021, in Italy the level of liquidity of companies, relative to operational needs, has been deteriorating rapidly since the beginning of 2022. The decline is more significant for small and medium-sized enterprises. The qualitative indicator is not at the lows of 2020, but the rapid decline is worrying. And it seems to reflect the greater resources (precisely liquid) that are absorbed by the monthly payments for inputs, especially energy.
Loans on the rise, with difficulty. The Bank of Italy survey shows, consistently, that the demand for short-term credit by businesses grew significantly in the 2nd and 3rd quarters of 2022, while that for the long term decreased. According to the survey, businesses are asking for more loans for inventories and working capital, less for investments: a clear symptom of an emergency scenario. On the banking offer front, signs of tightening have been recorded since the beginning of 2022, above all due to the worsening of the economic prospects, but also due to the difficulties of institutions with regard to capital and funding (which have not been recorded since 2012).
Analysts therefore note that the result is the return to growth of both business loans (+4.4% annually in September; peak of +8.7% in 2020), and of the share of companies that do not get them (7.8% in manufacturing in Q3, 4.5% at the end of 2021). The dynamics of credit to households also accelerated in 2022, albeit less (+4.2% in September). Already high debt. However, Italian companies, already weighed down by the emergency debt of 2020, necessary in the lockdown with zero turnover, today would need to lighten the burden of debt, first of all by lengthening the repayment times of existing loans, instead of going back into debt further. Furthermore, to the extent that the need for liquidity, induced by high energy prices, leads to additional debt, this occurs at increasing rates on new business: the debt burden, therefore, increases twice.
Curbing investments (and consumption) is the other chapter on which the Flash Conjuncture shines a light. All of this, Confindustria analysts conclude, is reducing the resources of companies available to make investments and does so in a scenario that had already veered in a recessionary direction. In fact, the debt burden will absorb a growing share of companies’ turnover if no action is taken on energy prices and if official rates continue to rise, as announced. At the same time, the same occurs in household budgets which, in the face of higher mortgage and other loan installments, find themselves with fewer resources for the consumption of goods and services.
There industrial production showed a marked decline in September (-1.8%), but on average in the 3rd quarter it fell slightly (-0.4%). Manufacturing held up well (-0.1%): this data, read together with the rapidly increasing inventories in the sector since April, suggests that some companies anticipated production, before the increase in energy prices actually paid (at the expiry of the contracts pre-crisis). This, analysts observe, could herald a marked fall in the coming months.
They qualitative indicators have worsenedcharting the course for a heavier minus sign in the 4th quarter: the PMI fell even further into negative territory in October (46.5); assessments on order books continue to decline (-9.6 in November); the confidence of manufacturing firms remains compressed. A stop in construction. In construction, the slowdown was confirmed, which was signaled by the indicators on construction sites in sharp decline. The sector’s production grew slightly in September (+0.2%) and on average in the 3rd quarter recorded a decrease (-2.2%), after no less than 6 consecutive quarters of strong expansion.
Services and consumption, on the other hand, went well in the summer. The recovery of tourism in Italy continued the rebound of services in the 3rd quarter: the expenditure of foreign travelers in August rose above the pre-Covid values for the first time and in September it reached +11.4% (from – 1.4% in July). The higher expenditure on services goes hand in hand with the recovery in consumption, but retail sales of goods also grow, at a sustained pace including the higher prices (+1.2% in the quarter; +2.1% for food). For the 4th quarter, mixed signals: in October the services PMI fell (46.4 from 48.8), consumer confidence recovered in November.
In September, exports returned to growth, thanks to extra-EU sales (which, however, yield in October). According to the Flash Conjuncture, the trend was robust on average in the 3rd quarter (+2.7% in value), but also due to the increase in prices (+1.1% in volume). The expansion of Italian sales is driven by the US market, especially in pharmaceuticals and clothing, also thanks to the weak euro.
On the other hand, exports to China and Japan are sluggish and sales in Russia reduced (by about a third). The indications on foreign manufacturing orders were negative, very weak in October. Looking ahead, the weakness of foreign demand will weigh, especially in Europe, due to uncertainty and inflation. World trade continues to grow, albeit at a declining pace, in the face of negative qualitative indications for months.