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Italy’s spending plans raise eyebrows

September 2018

Having recovered slightly during September, share prices in Italy fell heavily at the end of September as Italy’s government raised eyebrows with a controversial budget. The government plans to increase public spending, setting the budget deficit at 2.4% of GDP – a strategy that is at odds with European budgetary policy. 

  • Italy’s benchmark index has fallen by more than 13% since the end of April
  • The ECB sees inflationary pressures starting to pick up
  • Sentiment amongst German businesses remained broadly positive

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Having recovered slightly during September, share prices in Italy fell heavily at the end of September as Italy’s government revealed a controversial budget. The government plans to increase public spending, setting the budget deficit at 2.4% of GDP – a strategy that is at odds with European budgetary policy. Over September as a whole, the FTSE MIB Index rose by 2.2%; however, the benchmark index has lost over 13% since the end of April. 

“The underlying rate of inflation is predicted to grow relatively strongly”

The annualised rate of inflation in the eurozone rose from 2% in August to reach 2.1% in September, although much of this increase was attributable to higher oil prices. Once volatile energy and food prices are stripped out, the rate of inflation actually eased from 1% to 0.9% during the period. The price of Brent crude oil reached its highest level since the third quarter of 2014 during September, climbing above US$82 per barrel. 

European Central Bank (ECB) President Mario Draghi emphasised a “relatively vigorous pick-up in inflation” and rising pressure in wage growth. Hourly labour costs rose at an annualised rate of 2.2% in the eurozone during the second quarter. According to Mr Draghi, a sustained recovery in inflation will depend on interest rates remaining low into mid-2019. Looking ahead, the annual rate of headline inflation is expected to reach 1.7% each year until 2020. Mr Draghi predicts the contribution of “non-core” components to slow down while the underlying rate of inflation is predicted to grow relatively strongly. Inflation (excluding food and energy) is predicted to reach 1.8% in 2020.

ECB official Benoît Cœuré called for a greater level of forward guidance on monetary policy in the eurozone once interest rates in the eurozone finally start to tighten. Although rates are forecast to remain at their current level until the summer of next year, Mr Cœuré wants to see more clarity about the pace at which the central bank expects to tighten. Mr Draghi’s tenure at the ECB is scheduled to end on 31 October 2019.

According to the Ifo Institute’s business climate index, sentiment amongst German businesses remained broadly positive during September, although confidence deteriorated slightly compared with August. Optimism in the manufacturing sector declined; in contrast, the construction sector demonstrated exceptionally high confidence levels and strong incoming orders. The Dax Index fell by 0.9% over September. 


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