At first glance there is something odd about Italy’s economic data. For months its consumer and business sentiment has been stronger than almost anywhere else in the eurozone, yet economic activity still lags its peers.
This disconnect has become so marked that the Italian Treasury’s chief economist has suggested official gross domestic product (GDP) data issued by national statistics bureau ISTAT may not reflect the real state of the eurozone’s third largest economy.
Economists say such a marked gap between how people perceive the economy and “hard” data measuring specifics is unlikely to persist much longer.
Either growth will accelerate to justify the optimism, or sentiment will crumble.
“A significant divergence between confidence levels and activity doesn’t normally last more than two or three quarters,” said Citigroup economist Giada Giani.
Prime Minister Matteo Renzi is known for his repeated professions of optimism. He has cut taxes for workers and companies and says building confidence is the key to economic revival. On this front he seems to have already done his job.
The European Commission’s Economic Sentiment Indicator (ESI), gauging morale among consumers and business in the manufacturing, services, construction and retail sectors, shows Italy is among the most upbeat countries in the eurozone.
In December Italy’s ESI stood at 109.8, the fourth highest in the 19-nation bloc behind Spain, Malta and Slovenia. It has been above the eurozone average for every month since February 2015 and strengthened steadily through the year. Yet at the same time economic growth steadily slowed. And it’s not just the ESI.
Italy’s composite purchasing managers’ index (PMI), gauging manufacturing and services activity, was buoyant for most of last year and was the highest in the eurozone in December. ISTAT’s consumer confidence index is close to all-time highs.
The hard data tells a very different story. Last week ISTAT again dampened expectations when it reported industrial output in November fell 0.5 per cent from the month before, compared with market forecasts of a modest increase.
Factory output correlates closely with GDP in Italy, and ISTAT and the Bank of Italy now both estimate that GDP grew 0.2 per cent in the fourth quarter, the same listless pace as in the previous three months.
Full year growth in 2015 is seen at 0.8 per cent, around half the eurozone average rate and, with the exception of Greece, far behind the other “peripheral” economies in the currency bloc, Portugal, Ireland and Spain.
There seems to be an inconsistency between the Commission’s sentiment indicator for Italy and our modest growth
“There seems to be an inconsistency between the Commission’s sentiment indicator for Italy and our modest growth,” the Italian Treasury’s chief economist Riccardo Barbieri told Reuters after weaker-than-expected third quarter GDP data.
He suggested ISTAT may be consulting an outdated sample of firms to compile its industrial output and GDP figures, failing to include new, more dynamic businesses that emerged from Italy’s longest post-war recession between 2012 and 2014.
Asked about the discrepancy between Italian sentiment and growth, a European Commission economist said the buoyant ESI was mainly due to consumer morale, while the industry and services components were close to their long-term averages.
The consumer component, unlike the others, is based exclusively on forward-looking questions. People are asked how they see the prospects for jobs, the economy and personal finances over the next 12 months.
Renzi’s upbeat message that “Italy is back” after years of recession appears to have got through to most Italians, but this does not solve the chronically weak productivity and economic bottlenecks that have crimped its growth for two decades.
“If consumers realise growth is not as good as they expected we will see a downward correction of consumer confidence and of Italy’s ESI as a whole,” said the Commission economist. He asked not to be named because Commission policy is for only commissioners or spokespeople to speak on the record.
Gian Paolo Oneto, the head of national accounts at ISTAT, said it frequently adjusts the list of firms it uses for its industrial output data and recomposes the entire sample every five years, in line with most other eurozone countries.
It consults more than 10,000 companies for its monthly and quarterly economic indicators, and more than four million for its definitive annual GDP data.
“Any serious statistician has to accept the possibility we miss some rising star, but we will have it in our sample within 20 months at the latest,” he said.
“The chance that this could be responsible for weaker-than-expected growth in a given quarter is extremely low and is highly unlikely to change growth by as much as a decimal point.”
There have been other prolonged periods when Italy’s economic growth has failed to reflect survey indicators.
In 2014, its composite PMI averaged 51.6, clearly above the 50 threshold that separates growth from contraction, but GDP shrank 0.4 per cent in the third straight year of recession.
Rob Dobson, senior economist at Markit which conducts the PMI, said the survey excludes the construction, energy, retail and public sectors, and marked strength or weakness in any of these areas can account for a divergence from growth patterns.
Dobson said the PMI aims to identify changes in the business cycle but its relation to GDP growth varies from country to country, so it is wrong to imagine a certain PMI level will give the same rate of growth in two different economies.
Deutsche Bank economist Marco Stringa said Italy’s structural bottlenecks meant it had become virtually incapable of sustained, buoyant growth, regardless of morale.
“Italy has disappointed expectations over and over and over again,” he said. “Every year it grows below the eurozone average, and if you are always below the average you have a problem.”