Ciro Rapacciuolo

Another shock. The already complex scenario is aggravated by the increase in oil prices due to the Israel-Iran conflict. Italian industry held up at the beginning of Q2 and indicators improved for services. But duties on exports and uncertainty are deteriorating confidence, a bad sign for consumption and investments. Positive, however, is the continuation of the rate cut in the Eurozone.

The cost of energy goes up. The price of oil, which had been falling since early 2025 due to weakened expectations on global demand caused by duties, rose sharply in the wake of the Israel-Iran war (77 $/barrel on 20 June, from 63 on average in May). The price of gas in Europe (TTF) also rose: 40 €/mwh, from a low of 34 in May, which had been reached after three months of declines.

Credit in recovery. Credit for Italian households is increasing more and more robustly (+1.3% per year in April, from +1.1% in March), while that for businesses continues to register a negative annual change (-0.8%, from -1.1%) even though the trend in recent months has turned positive. The rate cut translated into a decrease in the cost of credit (3.8%, from 5.3% a year earlier).

Investment: slowing expectations. Investment surprised on a positive note in Q1 (+1.6%), with all components increasing (construction, plant-machinery, research). For Q2, however, the indicators are weak: in May, business confidence rose only slightly, to low values; uncertainty is high; orders for capital goods are negative; expectations for new orders drop for the second month.

Consumption: confidence still falling. Employment remained stable in April, but in May confidence fell for the third consecutive month, suggesting a slowdown in the propensity to consume. In fact, retail sales grew little (+0.5% in April, +0.2% in Q2) and car registrations were, again, slightly down (-0.1% annualised in May).

Services restart. In Q1, services surprised on the negative side (-0.1% added value), although tourism rebounded (+4.1% per year in foreigners' spending). For Q2, favourable indications: turnover grew in April according to RTT (CSC-TeamSystem); in May, the HCOB-PMI indicated a strengthening (53.2 from 52.9) and business confidence recovered somewhat after the drops at the beginning of the year.

Industry: stabilisation at risk. Production increased in April (+1.0%), making a good start to Q2 (+0.4% in Q1); however, levels remain depressed, following declines in 2023 and 2024. RTT in April confirms the industry's recovery in terms of turnover and the CSC survey shows less pessimism in May. However, the risks from tariffs are high for the sector and in May other indicators remain unfavourable: the PMI is only slightly in the contraction area (49.2 from 49.3), industrial business confidence barely recovers.

Exports come to an abrupt halt. In April, Italian exports decreased by 2.8% at constant prices, due to the collapse in sales to non-EU countries, while sales to EU markets increased. The front-loading towards the US in March, for some specific products, weighed heavily: net of this effect, we estimate a smaller drop in April (-0.6%). In the first four months of 2025 as a whole, however, Italian exports are still growing (+3.2% compared to the previous four months).

Eurozone slowing down. In the Eurozone, uncertainty remained high and confidence still stagnated in May, at low levels. In April, industry recorded a sharp drop in production (-2.4%), which affected all our main competitors (Germany -1.9%, France -1.4%, Spain -0.9%); the change in Q2, therefore, is negative (-0.4% for the Area). And in May the manufacturing PMIs are all recessionary, with the exception of Spain, which is just above neutral.

USA: weak production. US GDP in Q1 was revised downwards (-0.2% from -0.1%), remaining better than feared. Industrial production slowed down, worse than expected (-0.2% in May, +0.1% in April): in Q2 the change was almost nil (+0.1%), although PMI and ISM manufacturing indicate an expansionary profile. Slightly slower employment (+139K) did not dampen consumer confidence (60.5 points in May, after the March-April low).

China hit by duties. US tariffs weighed on Chinese industry: +5.8% annualised in May (from +6.1% in April), the lowest manufacturing figure in six months; the manufacturing PMI fell to 48.3 in May (from 50.4), marking the first contraction in eight months. Exports also slowed in May to +4.8% year-on-year (from +8.1%): slumping to the US (-34.5%), partly offset by South-East Asia (+14.8%) and Europe (+12.0%). Domestic consumption, on the other hand, accelerated: retail sales in April at an annual +6.4% (from +5.1%).

Dollar doubles duties, but eases ECB cuts.

Rapid and still ongoing devaluation of the dollar. Since the Trump administration took office (January 2025), the Dollar has fallen from 1.04 for one Euro, to 1.16 touched in mid-June (-11.4% overall). Much of this devaluation occurred since the day of the US tariffs announcement (2 April), when the Dollar was at 1.08 (-7.1%). This was an abrupt reversal from the strengthening in the last months of 2024; previously there had been a long phase (early 2023 - summer 2024) of small fluctuations around 1.08.

Uncertainty and increased risks from duties. One explanation is that international investors are reducing the share of US dollars in their financial portfolios, frightened by the high uncertainty inherent in the policies initiated by the US Administration and its impact on the US economy itself. The recent rise in the 10-year Treasury yield seems to confirm the relative 'distrust' in the debt but also in the US economy (4.38% on 20 June, from 4.12% on 2 April). Policy uncertainty itself, measured in the US and globally, has jumped abnormally since the beginning of 2025, following a path similar to that of the dollar-euro exchange rate.

The exchange rate does not follow the rates. It should be added that the dollar-euro exchange rate has taken the opposite direction to what the official rate differential and the US administration's introduction of tariffs should suggest. Indeed, while the ECB continued to cut, already reaching 2.00% at the beginning of June (from 4.00% at the start), the FED has been stuck at 4.50% (from 5.50%) since the beginning of the year. This large and unusual FED-ECB rate differential (+2.50 points) should attract more international capital to the US than to the Eurozone, leading to a strengthening of the Dollar against the Euro. The imposition of US tariffs should act in the same direction, leading to a lower outflow of Dollars abroad (for imports), which should push the Dollar to strengthen.

Negative consequences. The impacts of the exchange rate on Italian companies are linked to the issue of US duties, not only because the announcement of tariffs contributed to the devaluation of the Dollar, but also because the impacts of these two factors go in the same direction. The effects of the strong Euro on the Dollar, in fact, add up to those of the US duties on Eurozone exports. It can be said that they effectively amount to a 'doubling' of the duties, set at 10%, bringing the 'total export barrier' above 20%. On top of that, other currencies that follow the dollar could devalue, widening the negative effect on our exports to other markets.

Expected resilience. Italian exports have proven to be very competitive not only on prices, but especially on the quality of goods; moreover, a partial redirection of sales to other markets can mitigate the impact of duties. Moreover, the strong Euro does not only affect Italy's exports, but all Eurozone companies equally. And the European market is worth 52% of Italian sales abroad.

There is also a positive consequence. There is also a positive aspect of the recent exchange rate trend, which concerns inflation: the stronger euro moderates the prices of inputs and finished products imported into the area, such as oil, which is priced in dollars. This helps to keep inflation in Europe in check, which benefits households in particular, who see their real income more sheltered. Conversely, the weak Dollar can accelerate inflation in the US, because American imports become more expensive.

What will the central banks do? Another aspect, downstream of the devaluation of the dollar, is to understand what the ECB and the Fed will now do to achieve their goals. The strengthening of the Euro could favour (due to the aforementioned effects on prices) the path of ECB rate cuts, which have already reached the threshold beyond which one enters the 'expansionary' area. Conversely, the devaluation of the dollar could completely stop the cuts in US rates, which are still restrictive. An expansive monetary policy in the Eurozone can support our growth, stimulating both consumption and investments, while continued monetary restriction would continue to hold back the US economy.