Inflation is falling in Italy, but rates are high and perhaps not yet firm, so credit is overpriced and less available. Growth in the Italian economy is at a standstill: services are down and industry is still weak. Investments are going down, consumption is almost at a standstill, exports are better, but the outlook is not good. The Eurozone is close to zero, China is allocating 137 billion in stimuli, while in the USA growth in 2023 will be positive.

The Italian and International Economy in Brief

• Steady growth. Italy's GDP remained at a standstill in Q3 and indicators say that activity in services is slightly down in Q4, as in industry. Even though inflation in Italy is finally back below 2.0%, rates are at their highest and are blocking the credit channel, curbing consumption and investments, while exports are helping little. With the ongoing wars, uncertainty is rising but not the cost of energy (so far), which is, however, much higher than pre-crisis: in November, gas and oil at 41€/mwh and 85 $/barrel.

• Inflation coming back. Italian inflation fell abruptly in October to +1.7% per year (from +5.3% in September), thanks to a very favourable 'base effect' on energy prices, which plummeted to -19.7% per year (+26.8% in the same month due to the gas peak). Core prices of goods and services continue to brake down, but only slowly (+3.7%), as do food prices (+6.3%), thanks to the partial moderation of commodities. These values are not yet fully in line with the +2.0% threshold.

• Firm rates? At the beginning of November, the FED held the US rate steady for the second time (at 5.50%), as did the ECB at the end of October (4.50%). The base scenario is that rates have peaked, as indicated by futures, which discount the first cuts in 2024. However, Powell emphasised the risk of further hikes if US growth does not slow down and inflation remains high (+3.2%); and Lagarde reiterated that further hikes could also take place in the Eurozone if new 'shocks' change the scenario.

• Overpriced credit. The credit situation for Italian companies is getting worse: the cost rose to 5.35% in September, the drop in loans reached -6.7% per year. In Q3, demand continued to fall due to excessively high rates and the supply criteria became tighter: more and more companies are left without credit. Good news came from non-performing loans, stable at 19.3 billion.

• Declining services. In August, the expansion of tourism softened: foreigners' spending in Italy rose 9.5% over 2022, but -1.7% from July's peak. In September, the RTT index (CSC-TeamSystem) reported a moderate decline in services for the 3rd month in a row, and in October the PMI fell sharply (47.7, from 49.9) indicating a contraction, while business confidence continued to fall.

• Industry still weak. In September, production remained at a standstill. The third quarter recorded a barely positive change (+0.2%) but after four negative quarters: since the beginning of the year, it has fallen by -1.8%. In the last month, consumer goods declined (-2.2%), while production of capital goods (+1.5%) and intermediate goods (+0.8%) increased. RTT measures declining turnover and in October the PMI fell further (44.9 from 46.8), business confidence continued its fall (96.0 from 96.4).

• Investments down. The qualitative data point to a worsening investment dynamic, after the drop in Q2: the Bank of Italy survey in Q3 suggests a significant slowdown in capital goods expenditure (balance at 11.6, from 20.4 in Q2); among the hindering factors most felt by companies remains weak demand; and in October there was a new drop in the confidence of capital goods companies.

• Consumption almost at a standstill. Household confidence fell sharply in October (101.6 from 104.5) and the already weak consumption in Q2, especially of goods, seems to have slowed down further: retail sales fell in Q3 (-1.3% in volume). Employment also grew in September (+42,000, entirely on permanent contracts), after August (+0.4% in Q3); however, already in Q2 there was a decline in hours worked, which is expected to become more pronounced in the following months.

• Export is better. Italian goods exports turned positive in Q3 (+0.8% at constant prices) and did better than world trade. The outlook for Q4, however, is negative, according to foreign manufacturing orders in October, due to heightened geopolitical tensions and weak foreign demand. World trade is also sluggish: the global PMI on orders is in the restriction zone in October (47.5) and activity in European ports is low.

• Eurozone close to zero. In the summer months the area recorded a decline (-0.1%), after the modest increase in the 2nd (+0.2%). Spain continued to grow (+0.3%) and, to a lesser extent, France (+0.1%), while Germany contracted (-0.1%). Expectations for Q4 were negative: in October, economic sentiment fell to 93.3 from 93.4, weighed down by industry, and the PMI deteriorated sharply (46.5 from 47.2), in the contraction zone for five months.

• China reacts to the slowdown. China allocated $137 billion in stimulus to the economy, signalling a strong reaction to recessionary pressures in the construction sector; manufacturing contracted as a result of falling foreign sales. Cooling global demand also slowed Indian manufacturing and kept Brazilian manufacturing in recession for the 2nd month. In Russia, industry continued to grow, driven by domestic demand.

A Flourish data visualisation

Focus of the month - US: positive growth surprises in 2023. What next?

• US growth continues to surprise. The US GDP in Q3 2023 grew for the fifth consecutive quarter (+1.2%, after +0.5% in Q2), above expectations and strongly accelerating compared to the average of the previous four quarters (+0.6%).

• Consumption, but not only. Compared to Q3 2022, US growth was +2.9%. Driven in particular by consumption, which contributed 1.6% to this trend change (+0.6% consumption of goods, +1.0% consumption of services) and 0.7% to that of Q3 2023. On the other hand, investment seems to have reversed the negative trend observed in the second half of 2022 (+0.3% the contribution to the trend change in GDP), due solely to the negative contribution of construction investment (-1.4% in the last year, compared to +2.0% of other investment); which returned to growth in Q3, for the first time since March 2021. Net exports (+0.2% the contribution to the trend change in GDP, nil in Q3), inventories (+0.2% and +0.3%) and government spending (+0.8% and +0.2%) also contributed positively.

• Why did consumption go so well? The US performance, therefore, was mainly due to an unexpected resilience of household consumption decisions. These enjoyed a growth in hourly wages (+0.33% the average of monthly changes between July and September, +0.37% in Q2) greater than core inflation (+0.25% and +0.33%) and a consolidation of the labour market in 2023: the unemployment rate stabilised below 4.0% (3.7% in Q3, from 3.6% in Q2), jobs created between January and October 2023 in the non-agricultural sectors totalled 2.4 million (they had been 4.8 in 2022, of which 4.3 in the first 10 months), accelerating in Q3 (+799 thousand) compared to Q2 (+603 thousand). Moreover, households sustained purchases by eroding the cash reserves accumulated during the pandemic period: the propensity to save decreased more than in other countries.

• What about investments? US companies have been able to take advantage of the tax breaks introduced with the Inflation Reduction Act (IRA), a massive USD 386 billion plan (if we exclude the healthcare part) and do not yet seem to have suffered the full effects of the high monetary policy rates, with the exception of those in the construction sector.

• Weak industrial prospects. The cyclical analysis reveals some weakness in Q4. In Q3, industrial production had a good dynamic, thanks mainly to the increase in July (+1.0%), with a quarterly change of +0.6%, which follows the +0.2% in Q2. The assumed change for 2023 is +0.5%. However, the indicators, which had returned close to the expansion threshold during Q3, took a step back in October: the manufacturing PMI stopped right at 50 points (from 49.8), but the ISM and the Chicago Purchasing Managers' Index collapsed (to 46.7 from 49.0 and to 44.0 from 48.7) and the FED's local manufacturing indices were in recession.

• Risk of further rate hikes. There is still the possibility that, counting precisely on the resilience of the US economy, the Fed will decide to continue raising interest rates, to deal another blow to inflation, still above +3.0% (with core at +4.0%). At that point, the risk is that the ECB will decide to follow the path of 'further hikes', to avoid repercussions on the dollar/euro exchange rate that would fuel imported inflation. This would be another blow to the already sluggish Italian and European economies.

• Braking forecasts. Compared to Q4 2019, the pre-pandemic level, US cumulative growth until Q3 2023 was +9.6%, much higher than in the Eurozone (+3.0%). The main forecasters predict a continuation of the expansion in the coming year, but with a clear slowdown, already by the end of 2023: the Fed in September predicted GDP growth at +2.1% in 2023 and +1.5% in 2024, a scenario confirmed by the IMF in October (with the updated data, the annual growth already acquired for 2023 is +2.4%).

A Flourish chart