April 11, 2017    5 minute read

Italian Manufacturing: Where to from Here?

The New Order    April 11, 2017    5 minute read

Italian Manufacturing: Where to from Here?

The Italian economy is struggling to show signs of improvement. The Eurozone is growing at a 2% rate, but Italian GDP saw a deceleration from +0.3% in the third quarter to +0.2% in the last quarter of 2016. Most of this is attributable to weak domestic demand, with low investments and stagnant household consumption.

On the other hand, Italy’s trade balance showed an extraordinary surplus. In 2016, the balance had reached almost €52bn, with global exports nearly €417bn.

According to the most recent survey by Markit, Italian manufacturing production has shown strong expansion in the first quarter of 2017, based on an inflow of new orders and greater exports. The Markit Italy Manufacturing Purchasing Managers’ Index (PMI), which shows the development of overall business conditions, reached 55.7, the highest level in the last six years.

Due to the increment of global demand, new orders have increased significantly, accelerating job growth in Italian enterprises. On the other hand, the survey has warned about the increasing prices of raw materials, whose greater costs have translated into higher retail prices, causing inflation to rise.

Finally, the survey shows Italian businesses have positive feelings about 2017, even though the registered level of optimism has decreased since February.

Therefore, despite the fact that signals are extremely positive, growth of the Italian manufacturing sector is primarily due to exports.

Post-Article 50 Europe

Standard & Poor’s stated that Italy, along with Austria, is going to be one of the European countries least affected by Brexit, given that the exchange of goods and services between Italy and the UK is about 3% of Italian GDP.

From July to December 2016, Italian exports decreased 0.5%, and yet the Italian trade balance with the UK closed with a 0.5% surplus. On the other hand, forecasts for 2017 are far more pessimistic. Exports might go down 7%, causing total losses of between €600m and €1.7bn. According to Coldiretti, the Italian Confederation of Farmers, food exports will suffer the most. For instance, extra-virgin olive oil sales are expected to go down by 13%.

In any case, Italy’s most important trading partners remain Germany and France, with a focus on pharmaceuticals, food and fashion.

The United States

After the EU banned the import of hormone-treated meat, the US is considering the option of introducing custom duties on about 90 European products. At the moment, the relationship between the EU and the US is very fragile and is regulated by a memorandum. If Washington decides to change it, it will be in force for another six months. After that, the US might decide to impose new custom duties. But there is an upper limit: $116.8m, which equals the damage suffered by the US following the EU’s decision.

There are several Italian products likely to be hit by taxes, like motorcycles and food. Some of them are representative of the Italian spirit around the world, such as the Vespa, the legendary Piaggio scooter. Even in the worst of scenario, the effects on Italian exports should be limited, given that the weight of the motorcycles industry in 2016 was equal to €182m out of a total of more than €37bn. Finally, there will be no effects on the Italian groups that are active in the American market via American companies, such as FCA with Chrysler.

In 2016, the trade balance between Italy and the US exceeded €40bn, an increase of 18% on 2015, due to the favourable exchange rate. The industrial sectors that have achieved the best results are mechanical and industrial installations, furnishings and food.

Overall, the US is the third leading export market for Italian goods, whilst Italy is only 21st among recipients of American exports. The trade balance between the two countries equals approximately to €11bn, clearly in favour of Italy.

Other Countries

According to the Italian Institute of Statistics (ISTAT), in February this year, both Italian exports and imports towards non-European countries are shrinking. Exports are down 4.7% and imports 0.4%.

This trend hit most industries, apart from durable goods, which have seen a sales increase of 5.1%. Energy, down by 17%, and capital goods, down by 9%, are among those feeling the squeeze.

Over the last quarter, export trends towards non-European countries are undeniably positive, up to almost 5%, across all industry sectors. The energy market has been particularly active, reaching an increment of about 35%.

Annualised exports increased 3.6% in February, mainly due to energy (up 75%) and capital goods (up 6%). Compared to February 2016, the sales of goods towards China, Russia, Mercosur and ASEAN countries have gone up significantly – 31.6% in China and 25.6% in Russia.

Conclusion

The Italian manufacturing industry is returning to pre-crisis levels, driven almost entirely by exports. The vital question is how long this situation will actually last. The greatest uncertainty comes from the commercial relationship between the EU and the US, one often criticised by the Oval Office.

Over the next few months, President Trump will outline his plans for the American fiscal policy, and this will shed light on the markets.

On the other hand, there are no significant threats from the other countries, which is causing the confidence of Italian businesses to rise. Once again, what makes the difference is the domestic market, a victim of uncertain policies. In any case, the fact that Italian businesses have managed to stay competitive in the global markets, despite several domestic dysfunctions, is just more proof of how Italy could rise if governed correctly.

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