Italian consumer confidence has remained near a 10-year low in March in the wake of the Madrid terrorist bombings. In fact the bombings may have hurt sentiment in Italy more than the Sept. 11 attacks on the U.S. according to a statement from the government-funded Isae institute. The confidence survey, which was carried out between March 1 and March 12, showed that consumers who had been growing more optimistic about the prospects for lower inflation and improvements in unemployment turned pessimistic in the two days after the bombings. In fact while the 22-year-old Italian consumer confidence index touched its all time record low of 93.7 in April 1993, March was the third month in a row that the index has been below 102, the last time it was that low being in February 1994.
One significant factor which may be in the minds of Italian citizens today is that Italian Prime Minister Silvio Berlusconi has been – along with Jose Maria Aznar – one of the firmest eurozone supporters of the Iraq war. (Interestingly Klinga over at Living in Europe draws attention to the way a similar atmosphere may also exist in Poland). But this concern over the risk of a possible attack comes on top of an already weak confidence situation following an apparent economic growth standstill and the high profile Parmalat scandal.
The Italian confidence report is in fact the second from Europe to show the effect of the bombings. An index measuring German investor and analyst sentiment published last week posted the biggest decline in 16 months.
With exports affected by the 20 percent plus euro appreciation, economic growth in Italy ground to a halt in the final quarter of last year. Indeed Italian industrial production continued to decline in January for the second consecutive month.
The euro’s gain against the dollar, which has made European goods sold to the U.S. more expensive, has weighed heavily on any recovery which may have been in the offing in Italy. Exports to the U.S – which are responsible for 10 percent of Italy’s total exports (the US is its third-biggest trading partner) – fell 27 percent year on year in January2004.
Meanwhile in France, which is the second-largest economy in the euro zone, consumer spending was unchanged in February from the previous month, according to the Paris-based statistics office Insee.
All of this means there is increased pressure over at the ECB. Leading EU politicians like Gerhard Schroeder and Jean-Pierre Raffarin have been urging the European Central Bank to lower interest rates in an attempt to revive growth. ECB officials including President Jean-Claude Trichet have previously rejected the calls, saying that borrowing costs are already low enough.
The Madrid bombings, however, have increased speculation about a rate reduction. The implied rate on the three-month Euribor interest-rate futures contract for June delivery has it seem fallen today to 1.93 percent today from 2 percent on March 11. That rate is now lower than the ECB’s benchmark refinancing rate of 2 percent. The markets themselves have today responded to an interview Trichet gave to the German paper Handelsblatt yesterday (see below) by selling the euro in anticipation of a rate cute.
To give us an idea of where all this may be leading Handelsblatt has an English version of the Trichet interview. In the interview he suggests that the bank might be ready to cut interest rates if domestic consumption does not strengthen as expected. The ECB’s next rate-setting meeting is on April 1. Many commentators had thought that it was unlikely we would see any rate move in the near future. Now, given the shift in rhetoric, it seems that the Bank’s governing council members are at the very least likely to debate the issue.
You keep complaining about weak consumer confidence. Could lowering the interest rate help to prop it up?
In the normal course of economic activity, recovery most often starts with net exports, then passes over to investment and then, as the third stage of the rocket, so to speak, arrives at consumption. The first two rocket stages have ignited and we continue to follow the relevant hard data. We now have to examine very carefully the ignition process of the third stage. It is clear that household consumption is not only driven by the impact of stronger exports and investment, but also by consumer confidence. We have ascertained that consumer confidence today is not necessarily at the level that would be justified by the basic economic data.
Why is that?
I see three reasons. First, the development of the labour market is not satisfactory. This in turn comes from the structural impediments which characterise Europe and from the previous phase of the cycle. We have good reasons to think that this situation will progressively improve. Second, there is the unfortunate phenomenon that public opinion very often discovers the problems at the moment they are tackled, when governments, parliaments and social partners carry out the structural reforms that are urgently needed. This late and brutal discovery could have a negative impact on confidence. Had the public been more aware of the underlying problems, the reforms, when decided upon and implemented, would have increased confidence. That is the reason why we believe that transparency, pedagogy and tireless explanations are an essential part of preparing structural reforms: we all have a role to play in this domain, including the ECB, to make clear to people the advantages of the reforms as regards growth, job creation and higher standards of living. And third, there is a further point which touches upon the primary objective of the ECB. In a number of countries part of the population has the feeling that the inflation rate could be higher in the future and that their purchasing power will not be appropriately preserved. This has a negative influence on consumer confidence. We, on our side, have all reasons to trust that we have inflation under control and that prices will be in line with our definition of price stability. And we tell the public that we, as the guardians of the currency, are defending their purchasing power, that they can trust us and that they can invest and consume with full confidence.