Survey on Inflation and Growth Expectations June 2016, No. 35Supplements to the Statistical Bullettin - Sample Surveys

The interviews for the Banca d’Italia – Il Sole 24 Ore quarterly survey on inflation and growth expectations were carried out between 31 May and 17 June 2016. A total of 1022 firms with 50 or more employees took part, of which 385 operate in industry excluding construction, 418 in services and 219 in construction.

The main findings for firms in services and in industry excluding construction

Inflation expectations in Italy and change in firms’ selling prices

Consumer inflation expectations were revised downwards across all time horizons, most markedly those six months ahead (from 0.4 per cent in March to 0.0 per cent). The expected inflation rate for the other periods fell by 0.2 percentage points to 0.3 and 0.6 per cent for one year ahead and two years ahead, and to 0.8 per cent for between three and five years ahead.

Firms reported a slight decline in their selling prices compared with a year earlier (-0.1 per cent), an improvement on the more marked decline reported in the previous survey (-0.5 in March), owing mainly to firms in the industrial sector. Selling prices are expected to grow at a faster pace (of 0.9 per cent) over the next twelve months, up 0.5 percentage points on March, owing to the raised expectations among the largest firms (at least 1,000 employees) and among those belonging to industry excluding construction.

Competitors’ pricing policies remain the main factor holding back the expected increase in selling prices, while other factors contribute about equally to an acceleration.

Assessment of the general economic situation

The share of firms that view the general economic situation as stable grew to over 80 per cent. The balance between reports of improvement and deterioration remains slightly positive, although it has been falling since September 2015. The average probability assigned to an improvement of the economic situation in the next three months remained essentially unchanged from three months ago at 15 per cent.

Demand

Firms’ views on changes in current demand have slightly improved, with a balance between those that expect an increase and those that expect a decrease coming to 6.0 percentage points (+0.6 per cent on the previous survey). This result reflects the improving trend reported by large firms (at least 1,000 employees) and those in industry.

The balance between expectations of an increase or decrease in demand for their products in the next three months deteriorated slightly, coming at just above the levels reported in December (16.7 percentage points, from 25.3 points in March). Assessments of current conditions in foreign demand also continue to be favourable, with the balance better than in the preceding three months. The balance of expectations over the next three months instead indicates a slight decrease, reflecting the decline for industry excluding construction, while the share of those firms expecting conditions to remain unchanged rose. Around 40 per cent of exporting firms report that their expectations of foreign demand have been significantly influenced by geopolitical developments in target markets; compared with the start of 2015 the importance of these factors rose for 26.5 per cent of firms and declined for 8.6 per cent.

Assessment of business conditions

Firms’ expectations of the economic conditions in which they will be operating over the next three months have deteriorated slightly, although they broadly continue to point towards stable conditions (81.0 per cent;): the balance between positive and negative views is 4.9 percentage points, compared with 8.5 points in March. As in the previous survey economic activity is primarily bolstered by changes in demand and, to a more marginal extent, by improved credit access conditions and price developments; with respect to the previous survey, the negative effect of the uncertainty attributable to economic and political factors continues, while the positive effect of oil prices, which has become neutral, has waned. Firms' expectations over the next three years remain broadly positive.

Investment conditions

Assessments of investment conditions were stable for a rising share of firms (81.7 per cent, from 77.9 per cent). The balance between expectations of an improvement and a deterioration is still positive, but has narrowed since March to 6.1 per cent from 8.8 per cent.

However, firms have revised upwards their projected nominal expenditure on fixed investment for the first half of 2016 as compared with the second half of 2015 and for the year as a whole. The balance between expectations of an improvement and a deterioration is 12.1 per cent (from 7.7 in March) for the first half of the year and 20.7 per cent (from 18.7 in March) for the year as a whole. The improvement is expected in both the industrial and the service sectors, mainly for smaller companies (those with between 50 and 199 employees) and for those focusing more on the domestic market.

For the third time firms were asked whether the investment incentive on capital goods (super ammortamento) contained in the 2016 Stability Law had influenced their investment plans. Compared with the prior quarter the share of firms that considered it sufficient or very significant rose (15.4 per cent, from 12.1 per cent in March), although the majority of firms continued to report that it had no appreciable effect or was not significant for them (84.6 per cent).

Compared with the previous survey, the number of firms in industry excluding construction that declared they had passed the most difficult stage of the economic downturn rose to 47.4 per cent (42.5 per cent in March), while the views of the service sector firms remained stable. The percentage of firms predicting a solid improvement in their future production rates fell slightly to 43.5 per cent (46.6 per cent in March).

Liquidity and access to credit

The perception of firms’ conditions of access to credit has continued to improve. In the last quarter the balance between firms reporting better conditions compared with the previous quarter and those indicating greater difficulties rose to 5.1 percentage points (from 3.7 points), particularly owing to the improvements for firms operating in the service sector; the balance has, however, narrowed for the largest firms.

As to expectations concerning their liquidity position in the next quarter, both the share of firms that expect it to be insufficient (15.5 per cent, from 13.3 per cent in March), and the share of those that deem it to be broadly adequate for their needs (24.3 per cent, from 22.3 per cent in March) have risen marginally.

Employment

Expectations for employment in the short term continued to improve, albeit slightly: the balance between firms estimating an increase in staff numbers and those expecting a reduction rose to 6.2 percentage points (4.8 points in March). The most favourable assessments come from industry excluding construction and the service sector, but only for the North and particularly among the smallest firms (less than 200 employees).

Construction firms

In June almost 80 per cent of construction firms view the general economic outlook as essentially unchanged. However, the balance between expectations of an improvement and a deterioration narrowed to an average of 0.7 percentage points, from 5.4 points in March. This reflects the deterioration in expectations of improvement among firms that realized up to one third of their turnover from residential construction (10.9 per cent, from 17.6 per cent in March). The average probability assigned to an improvement in the scenario in the next three months slightly worsened at 10.7 per cent.

Assessments of growth in demand for the reporting firms’ own products mostly point towards it remaining stable, at 67.3 per cent, with the balance between firms reporting an improvement and those reporting a deterioration positive by 1.5 percentage points (from -3.3 percentage points in March) for the first time since June of last year. The expectations for demand for the reporting firms’ own products in the next quarter also remain stable; the deterioration reported by firms most heavily involved in residential construction (-2.4 per cent, from 7.4 per cent in March) stands in contrast to the greater optimism of other firms.

The balance of firms' assessments of the economic conditions in which they will operate for the next three months is slightly more negative (-2.7 per cent from -1.9 per cent in March). Firms expect to benefit in particular from the trend in demand for their own products (both new and pre-existing orders), albeit to a lesser extent than in the March survey, in part attributable to credit access conditions and developments in oil prices. Uncertainty generated by economic and political factors continues to be the main hindrance to business.

Expectations three years ahead remained positive and basically stable compared to the last survey, at around the same levels, confirming the trend of improvement for residential construction firms: the balance between firms expecting better conditions and those instead expecting a deterioration came to 47.8 percentage points, just as in March.

Firms' views on investment conditions remain favourable: the balance between those indicating an improvement and those instead expecting a deterioration with respect to the last quarter rose 2 percentage points to 5.5 percentage points. The balance between firms indicating an increase in nominal expenditure on fixed investment in the second quarter of 2016 compared to the previous period and those expecting a decrease nevertheless worsened at 4.3 percentage points (from 9.7 percentage points in March). The trend has also been confirmed for 2016 overall compared with 2015, with the balance showing a decrease of 11.3 percentage points (18.6 points in March). The deterioration in investment expectations mainly reflects the decrease in the share of firms most heavily involved in residential construction that expect their expenditure to rise.

Assessments of credit access conditions improved marginally: the balance between firms expecting an easing of credit conditions compared with those expecting a tightening fell to -6.9 per cent (-7.6 per cent). Expectations concerning firms’ liquidity position over the next three months appear to be slightly more favourable: the share of firms that expect liquidity to be insufficient dropped to 29.2 per cent (from 30.1 per cent in March). Pessimism over employment conditions over the next three months continued to subside: the negative balance between expectations of an improvement and a deterioration has slightly improved (-7.4 percentage points, from -9.1 points in March).

Full text