Italy 2022 Consumer Outlook: Bleak Outlook As Households Facing High Inflation

Fitch Solutions / Consumer & Retail / Italy / Tue 06 Sep, 2022

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Key View: Growth in real household spending in Italy will decelerate in 2022 and 2023 from a high 2021 base, as economic growth slows and consumers feel the effects of rising inflation. We believe the true impact of a weaker economic environment will be felt over H222 and H123, as household savings are diminished and consumers grapple with significantly higher utility costs, while nominal wage growth stalls.

Outlook For 2022 And 2023

We forecast real household spending to rise by 3.2% in 2022, as favourable base effects wane off and the reopening of tourism feeds through into greater household spending. However, the realities of a weaker economic environment locally, but also across the European region, weigh on household's disposable income for spending. As such, we forecast real household spending to slow significantly over 2023, to just 0.2% growth.

Spending Growth Will Slow In The Short Term

Italy - Total Household Spending, Real Growth, % y-o-y (2019-2026)

e/f = Fitch Solutions estimate/forecast. Source: Eurostat, Fitch Solutions

Slowdown In Retail Sales As Inflation Weighs On Spending

Since our last update, retail sales growth has slowed considerably, from 6.8% y-o-y growth in May 2022, down to 1.4% y-o-y in June 2022, with latest data for July 2022 showing a y-o-y contraction of -1.1%. Retail sales were largely positive over H122, supported by a re-opening effect following the lifting of all Covid-19 restrictions. This translated into a recovery in consumption of both goods and services, the latter boosted by a good recovery in domestic and international tourism flows. However, elevated and sustained inflation is now weighing on real disposable incomes, which will be the case over H222 and H123. This is already being felt in consumer confidence readings, which have slumped to below the 100 mark for the past three months (June-August 2022). While election fever has seen confidence levels jump in the latest reading (98.3 in August 2022), consumers note struggling with higher prices as a key concern.

Retail Sales Turns Negative, Amid Slump In Confidence

Italy - Retail Sales & Consumer Confidence (2020-2022)

Source: National Institute of Statistics, Fitch Solutions

Insights Into Consumer Spending

Our forecast for slower real growth in consumer spending in Italy in 2022 is in line with our Country Risk team’s forecast that the Italian economy will grow by a real rate of 3.4% over 2022, slowing from the 6.6% growth in 2021. However, forecasts for 2023 are much bleaker, with real GDP forecast to grow just 0.4% y-o-y. Survey data suggest that the post-pandemic rebound in the services sector is faltering, as cost of living issues have begun to dominate. While the unemployment rate dropped to a 10-year low of 8.1% in June 2022, nominal wage growth remains stagnant. With inflation running at 8.4% y-o-y in August 2022 (latest data), this has delivered a major hit to real disposable incomes, which is being only partially offset by fiscal subsidies that are worth roughly 2.0-2.5% of GDP, but are aimed at both businesses and households. There are also some early signs that peak labour market tightness has already been reached, with deteriorating business confidence likely to see hiring slow. Against this backdrop, we suspect that consumer confidence will remain subdued, with demand for precautionary savings possibly set to push higher.

Italy's Economic Overview
  2022f 2023f
Real GDP (% chg y-o-y) 3.4 0.4
Unemployment (% of total labour force) 8.2 8.8
Consumer price inflation (% y-o-y, ave) 7.5 4.0
Total tourist arrivals, '000 % y-o-y 83.3 53.2
f = Fitch Solutions forecast. Source: National sources, Fitch Solutions

Inflation Outlook

Inflationary pressures in Italy are still very elevated. Over the latter half of 2022, inflation is beginning to shift into services, such as tourism. Rising consumer price inflation has been the key risk to consumer spending over 2022, and has been eroding purchasing power and shifting consumer spending away from discretionary spending. This is the economic reality which consumers enter 2023. Inflationary pressure started to rise globally in 2021, as base effects, higher commodity prices and supply chain challenges created localised shortages. The Ukraine-Russia conflict has also significantly impacted the global supply prices of key commodities, such as oil and gas, fertiliser, wheat, corn and barley. The commodity price increases are already feeding through into higher consumer prices and will continue to over 2022.

Latest data places consumer inflation at 8.4% y-o-y in August 2022, having consistently built higher over the past two years. Our Country Risk team forecasts that inflation will average 7.5% over 2022, the highest reading in 30 years. This rate is forecast to ease over 2023, down to an average of 4.0% over the year, but still higher than the ECB's 2.0% target rate. This will hit disposable incomes the hardest, with a majority of households likely to post real contractions over the next two years.

Inflation Will Be Elevated Over 2022 And 2023

Italy - Consumer Price Inflation, % y-o-y (2019-2022)

Source: National Institute Of Statistics, Fitch Solutions

Government Support

In May 2022, Italy's government unveiled a new stimulus plan designed to support Italian households, firms and the economy amid rising inflation and supply-chain disruptions as a result of the Russia-Ukraine conflict. The new outlay comes on top of the EUR15.5bn already budgeted since January 2022 to help firms and households with soaring electricity, gas and petrol prices. The new EUR14bn package includes state guarantees on bank loans, up to EUR400,000 in grants to thousands of firms hit by the Ukraine crisis and sanctions on Russia, a one-off bonus of EUR200 for millions of low and middle-income Italians and an extension until July 8 of a cut of 25 cents per litre in excise duties on fuel prices at the pump. Prime Minister Mario Draghi said that his government remained 'intense, determined and decisive' in its commitment to supporting companies and families in Italy and the overall economy, and that it was ready to adopt further measures as necessary. We believe that the stimulus measures will support growth in consumer spending in 2022 by shielding Italian consumers from surging energy costs and thereby mitigating the rising cost of living. There are upside risks to our forecasts should the government implement further packages in the coming months.

Wider Economic Challenges

Supply chain issues continue, having first appeared when economies globally started to reopen in 2021, with consumers demanding products that they had little access to over the previous year. This has and continues to place pressure on manufacturers, with bottlenecks and consumer goods shortages emerging, which has fed through into supply-side inflation. The global semiconductor shortage for example will continue through 2022 and into 2023, putting pressure on the supply of multiple consumer goods. In 2022 the risks surrounding Covid-19 have moderated, as population immunity (from vaccines and prior infection) combined with less severe variants have meant that death rates have remained low through recent infection waves. This has seen many markets globally adopt a more 'live with Covid-19' approach to movement and operating restrictions, although some nations are retaining a ‘Zero-Covid’ policy.

More transmissible variants of Covid-19 and Mainland China’s Zero-Covid policy are causing the disruption/closure of factory production and manufacturing across the world. Manufacturers are facing shortages of key components and higher raw materials costs. Inventory levels are increasing, as consumer demand shifts away from products and into services (such as tourism). This will elevate some price pressures, as companies offload stock at a discount. Finally, the Russia-Ukraine conflict continues to place significant supply pressures on key commodities, especially food supplies, pushing up final market prices across a spectrum of consumer categories. Some countries (such as India, Malaysia and Argentina) have reacted by placing their own restrictions on the export of food items, putting further pressure on global prices. The graphic below highlights some of these risks to outlook impacting the Italian consumer market in 2022 and as we look to 2023.

Italy Highly Exposed To Global Risks
Global Risks To Outlook
Source: Fitch Solutions

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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