GDP growth. Construction and services fuelled the good dynamics of Italian GDP in Q1. Positive signs on the consumption of goods, together with the rate cut, anticipate a minor downturn in industry in Q2. Growth in tourism continued, fuelling net exports, along with a drop in imports. Low business confidence and problems in transport and energy prices remain.

Rate cut started. The ECB in June decided on the first rate cut, to 4.25% (from 4.50%), as expected. But now markets expect only another -0.25% by 2024 because inflation is still high; then a -0.50% in 2025. Europe moved ahead of the FED, which is holding US rates steady (at 5.50%). So far, there was no significant impact on the dollar/euro exchange rate (stable at 1.08). Sovereign spreads were little affected by the EU elections (BTP-Bund at +141 points on 11 June, up from 132 on 7).

Wide inflation gaps. In Italy, inflation was steadily low (+0.8% per year in May), thanks to falling energy prices (-11.7%) and core prices that fell to +2.0%, on the ECB threshold. In the Eurozone, on the other hand, inflation was on the rise: +2.6% overall (from +2.4% in April and May), +2.9% the core. In the US it is even worse: at +3.3% in May (it was +3.1% in June 2023) and +3.4% the core measure.

Energy pricesopposite dynamics. The price of oil falls but remains high: an average of 78 dollars per barrel in June (it was 90 in April): this tends to moderate consumer fuel prices. In contrast, the European price of gas is going in the opposite direction, rising to 34 €/mwh in June from a low of 26 in February: this will have an impact on electricity and gas prices for households and businesses.

Less rosy scenario for services. After anticipating the average expansion in Q1, the RTT for services (CSC-TeamSystem) reported an upturn in April, recovering the isolated decline in March. In May, the PMI lost only one decimal (54.2 from 54.3), remaining in the expansionary zone. However, business confidence fell for two months in a row, casting doubt on growth in Q2.

Industry: clearing up in sight? In Q1, industry recorded -0.4% in value added and in April a drop in production (-1.0%), although RTT indicates that turnover has recovered to February levels. In May, the HCOB PMI fell (45.6 from 47.3) and business confidence remains stuck at modest values; the CSC survey of large companies, however, shows an improvement in production estimates in the current month, consistent with the timid rise in short-term expectations (Istat).

Lights and shadows for domestic demand. Both consumption (+0.3%) and investment (+0.5%, but -1.5% in machinery-equipment pending Transition 5.0) grew in Q1. The indicators improved in May: household confidence recovered the level of the beginning of the year; orders of capital goods companies partially recovered. Lower credit costs will play in favour, although the expected decline is limited; conversely, construction investment is expected to slow down.

More work but less productivity. Labour input continued to grow in Q1 2024, both in industry (+0.2% full-time units), despite the decline in value added, and in services (+0.8%), where it has been growing more than economic activity for two quarters. This is reflected in a declining labour productivity, which in industry has fallen back below pre-Covid levels since Q3 2023.

Export of goods improving. In Q1 2024, world trade continued to be weak (+0.3% in volume); better prospects for the coming months, according to global manufacturing foreign orders, which returned to the expansionary zone after 9 quarters. In April, Italian goods exports increased (+2.3% in value, +3.8% extra-EU), after the contraction in Q1 (-1.0%).

In the Eurozone more confidence. In April, industrial production rebounded, after declines in March, in both Germany (+0.3% from -0.3%) and France (+0.6% from -0.2%); in Spain, however, it remained flat (after -1.1%). May saw an improvement in confidence (ESI index at 96.0 from 95.6), but still below the average level of 2023. In contrast, labour market expectations declined (EEI to 101.3 from 101.6).

USA: industry weak, jobs good. Industrial production in the US in April remained stationary at the March level, even though a recovery is emerging in Q2 (+0.4% gained), after declines in the last two (-0.5% in Q4, -0.3% in Q1 24). On the other hand, the signals for manufacturing were weak in May: the PMI rose (51.3 from 50.0), but the ISM fell (48.7 from 49.2) and the slump in the Chicago index worsened (35.4 from 37.9). Hiring, however, accelerated (272 thousand, from 165), as did average hourly wages (+0.4%, from +0.2%).

Industry runs in China. Manufacturing accelerated (PMI at 51.7 in May from 51.4) for the seventh month in a row. Exports are the driving force (+7.6% year-on-year), driven by electronics, 3D printers and electric vehicles (the new protectionist measures being launched by the US and EU will have an effect on these). By contrast, the slowdown in Chinese imports (+1.8% from +8.4%) reflects the fragility of domestic demand.

A Flourish data visualisation

Focus of the month - Consumption of goods and services 'normalising'

Consumption with little momentum. Total private consumption in Italy in early 2024 is just above pre-pandemic levels (+0.2% in Q1 compared to Q4 2019). This level, however, had already been recovered in Q3 2022: in the last year and a half, therefore, consumption has been fluctuating around a more or less unchanged level.

Consumption of goods recovers. The weak part of private consumption has long been goods. At the beginning of 2024, spending on goods in Italy finally recorded a significant recovery (+1.1%). But this is still very partial, after five quarters of tendential fall (-2.8% from Q3 2022 to Q4 2023).

Volatile consumption of services. Spending on services, on the other hand, has shown an upward trend over the past year and a half, but with much volatility. In fact, there has been a decline in the last two quarters (-2.2% in Q4 2023 and -0.6% in Q1 2024), but this is nothing new: since the pandemic, i.e. in the 4 years between 2020 and 2023, expenditure on services has always shown a significant decline in Q4, and in 3 out of 4 years also in Q1. Volatility that was previously unknown, when the trend in services expenditure was much more stable. Thus, the most recent negative data may not even anticipate a downturn in this part of expenditure, which remains on an upward path.

Food, the worst performing item among goods. Among the consumption of goods, food consumption suffered particularly badly: national accounts (NAC) data show a decline of -3.5% in the last two years, between Q4 2021 and Q4 2023. That is continuing in the first months of 2024, according to retail sales data: -1.1% in April compared to the end of 2023 (in volume). Two causes can explain this phenomenon: rising food commodity prices; increased consumption of meals away from home (which, like home meal delivery, is accounted for under 'services').

Tourism, the best performing item among services. Spending by foreigners in Italy (Bank of Italy data, at current prices) boomed in 2023, above pre-Covid values, and in early 2024 is continuing to grow (+12.9% per year in March). Taking into account the rising price dynamics (CN ISTAT data), consumption by non-residents in Italy rose to EUR 11.5 billion in Q1 2024, at pre-Covid highs (11.6 in Q2 2019). In particular, expenditure on hotels and restaurants in Italy (of residents and non-residents) is growing strongly: +10.1% in Q4 2023, compared to Q4 2021 (at constant prices), opposite to the decline in food.

Pre-Covid level recovery completed. For both goods and services, although with different trajectories, spending has returned close to pre-pandemic levels. In Q1 2024, goods are just above end-2019 values (+2.8%), while services are just below (-2.1%). Therefore, more synchronised consumption dynamics are expected this year and no longer 'inflated' by the post-pandemic recovery. This, of course, means lower annual consumption growth.

Expenditure will again depend on income. In recent years, first the sharp fall and then the fast recovery of consumption, while real income showed much less movement, were reflected first in a huge increase in the propensity to save, largely involuntary, i.e. forced (19.9% of income in 2Q2020, from 8.2% between 2015 and 2019), then in a marked decline (5.3% in 4Q2022). Propensity is now rising again, to 7.0% in Q4 2023, and is expected to continue normalising in the coming quarters, towards the pre-pandemic average. Consumption will more closely follow the path of real income again, especially from 2025.

More demand for goods for industry? Looking ahead, the recent upturn in the consumption of goods is a good sign for Italian industry: it means, in fact, an increase in domestic demand for manufacturing products, which has long been under pressure. In contrast, foreign demand for Italian goods fell in Q1 2024 (-0.5% at constant prices), reflecting the negative dynamics of global imports. The outlook appears uncertain: judgments on foreign orders worsened in April and May.

A Flourish data visualisation