The deterioration is more marked in manufacturing and less so in services, which are benefiting, alongside retailers, from a prolonged tourism-related re-opening effect. We expect Italy to avoid a quarter-on-quarter GDP contraction in the third quarter of the year, but not in the fourth quarter.

We think the Italian economy will avoid a GDP contraction in the third quarter, mainly on the back of a protracted tourism-related re-opening effect

Qualitative evidence continues to point to a deterioration of the economic environment over the third quarter. This is what confidence data for August are telling us, with some exceptions.

Manufacturers more downbeat

This is more apparent in the manufacturing sector, where confidence fell two points between July and August, the lowest reading since last February. The fall in confidence was more marked for intermediate and investment goods, where orders are softening and inventories of finished goods are increasing, but with only a limited bearing on production expectations. Consumer goods were less affected, though. Here, the softer deterioration in orders did not prevent a soft improvement in production expectations.

Retailers substantially more upbeat, likely reflecting an ongoing re-opening effect

In a way, the detail in the manufacturing survey shows that in the midst of the summer, the re-opening effect which had likely strongly affected 2Q22 growth data (we will know the details next week) was still at work in 3Q22. This seems confirmed by other parts of the business survey, more specifically by the sharp increase in retailer confidence, which reached pre-Covid levels in August.

Tourism businesses happy about current activity levels

Confidence held up better in the service sectors, where the headline index lost only half a point. The re-opening effect is still at play there too, but some warning signals are starting to emerge, in particular in the tourism sector (where we still lack official data on arrivals for 3Q22). Here, judgements about current turnover are even improving, but the evaluation of orders is softening and expectations about future orders are dropping.

Comforting rebound in consumer confidence

The idea that the re-opening effect might have continued over the summer is finally supported by another bit of good news coming from the consumer front: the rebound of consumer confidence is back to June’s level. The absolute level of the index remains very low (close to 2020 lows), but August’s rebound signals that the deterioration did not accelerate over the summer. The resilience of the labour market (helped by tourism-related hirings) and the strong measures put in place by the government to limit the impact of gas and electricity price shocks on households’ balance sheets have very likely supported consumers’ spirits.

Italy might avoid a GDP contraction in 3Q22

All in all, today’s confidence report supports our view that over 3Q22, the Italian economy will temporarily manage to avoid a GDP contraction, mainly on the back of a protracted tourism-related re-opening effect. However, as the summer season is over, we suspect that both services and manufacturing will act as a drag on growth, bringing GDP growth into negative territory both in 4Q22 and 1Q23. As far as 2022 is concerned, we confirm our forecast of a 3.3% average GDP growth.

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