Italy’s Consumer Confidence Falls Well Below Past Recession-Start Levels

Italy shivers while the Euro Area overheats: What good can come of this?

Not only is PM Prodi having a difficult time, but so is the Italian consumer. Whatever fate awaits Prodi, the consumer is already giving a vote of no-confidence to it. This is despite some resilient data from elsewhere in the Euro Area. The German IFO index actually rose in January. The ECB is thinking of hiking rates according to some of the day’s commentary. If you are an Italian consumer however, you must wonder if the world has gone mad. The Euro Area may be coming into one of its really big tests. Inflation has run hotter in some EMU countries than in others. But because of the single currency there has been no relief for competitiveness. There is no local currency to depreciate. Italy is one of those regions.

Since all EMU countries are pent up in the same currency area, what will affect competitiveness within the Zone, as well as between the Zone and other areas that is nationally different, is the local inflation rate, as well as any productivity differences. The small table below shows that since March of 2000 Finland is the most competitive EMU nation with a national price index that is some 7.2% below the EMU average for that period. Germany is next at -4.2%. Italy ranks as seventh worst among the 12 countries ranked here with a price level that is 1.2 percentage points ABOVE the EMU average. That would make Italy some 5.4% less competitive than Germany for the period and 8.4% behind Finland. Ranking below Italy is The Netherlands, Luxembourg, Portugal, Ireland, Spain and Greece.

If Italy’s problems are due to that sort of competitiveness loss we should also find encroaching weakness in those lower ranked countries as well.

For now, whatever the source, Italy’s consumers are feeling the pinch. Confidence is in the bottom 20% of its range. The current overall situation is in the bottom six percent of its range. The expected overall situation in the next 12 months is the worst in this period. And so on, see the percentile column in the table above. The Italian household sees things as being bad, and as getting much worse. It is no wonder Prodi is having trouble, and it will be a real test of European unity to see what happens in Italy if the ECB goes ahead with the rate hikes that the Bundesbank’s Weber was warning of today.