ROME, July 24 - Italian business confidence slumped to its lowest level in 18 months in July with executives deeply concerned about the state of Europe's fourth-largest economy and the prospects for an early turnaround. The survey, conducted on 4,000 businesses at the start of July, coincided with Italy taking on the rotating presidency of the European Union, a period marked by controversy after a spat between Prime Minister Silvio Berlusconi and an EU politician.
During the same period, the government was also involved in tense negotiations over next year's budget with unions and business leaders, which economists said could have contributed to the dent in morale. "It's difficult to establish such links, but during the early part of July there was political turmoil...which could have had an impact," said Luigi Speranza at Paribas in London. "It gave the impression that the commitment to economic reform was not there and that could have affected sentiment." The survey, conducted by government-funded think-tank ISAE, showed confidence fell to a seasonally-adjusted 87.1, from 90.7 in June. June was previously reported as 91.6. The drop took the index to its lowest level since November 2001, when virtually all economic indicators slumped following the September 11 attacks on the United States.
It also left Italy out of step with Germany, Europe's largest economy, where the recent ZEW survey pointed to a sharp pick-up in morale in July, and Belgium is looking up too. TOUGH MONTHS AHEAD ISAE said the fall was due mainly to a marked worsening in short-term production expectations and said manufacturing order books were also in a poor state. "There is a high level of uncertainty about the economy," ISAE said. Expectations for output and orders in the next three months were "sharply worse" than just a month ago, it added. The figures, which came just two days after ISAE's consumer survey showed a small gain in morale among shoppers, were substantially below economists' expectations.
"The numbers are clearly disappointing given the rise in the euro, the positive surprise from Germany last week and the Belgian business confidence indicator," said Holger Schmieding, an economist at Bank of America. Others expressed concerns about the numbers weighing on investment and growth during the second quarter, with Italy currently on the brink of recession following a 0.1 percent contraction in gross domestic product in the first quarter. A recession is technically defined as two consecutive quarters of contraction. For the whole of 2003, the government is forecasting growth of 0.8 percent, a forecast that has been gradually scaled back in recent months and still stands above the expectations of the IMF and ISAE, both of which see growth of 0.6 percent.
In the business survey, ISAE said confidence was down across the board, falling among manufacturers of consumer, intermediate and investment goods. Small and large-scale manufacturers were harder hit than medium-sized firms, the survey showed. With random black-outs affecting some northern Italian firms in recent weeks, the result of weeks of high temperatures which have seen power demand shoot up and production affected by drought, business morale is likely to be further dented. Speaking ahead of the release of the July data, an ISAE official told a parliamentary hearing there had been a "very sharp" fall in confidence for the month and that those conditions were expected to continue in the months ahead.//