Recovery is showing: time to invest

  

Here we are, at last! The recovery signs for the economy – also for Italy – are there to see. Now, for the furniture industry first of all, we have to understand which direction to take, and most of all invest to increase competitiveness in a scenario that is still uncertain and fragile. Csil (Centre for Industrial Studies) tries to draw a potential roadmap with two documents that illustrate the current economic trends. One is the “World Furniture Outlook 2016”, a report providing analytical data on the furniture industry and forecasts on the 2015-2017 furniture demand growth in 35 European countries, 15 in Asia Pacific, 12 in the Middle East and Africa, 3 in North America and 5 in South America. The second one is the “Forecast report on the furniture industry in Italy”, which traditionally gives an updated and detailed picture of possible developments, highlighting risks and opportunities. The 2015 report analyzes the following market segments: upholstered furniture, kitchen furniture, home and office furniture, with preliminary 2015 figures and 2018 forecasts for production, export, domestic consumption and import, as well as a focus on investment strategies by Italian companies in the past five years.

 

Both publications by Csil were presented in Milan last November, with an introductory overview of the global macroeconomic situation in the 2016-2018 period by Stefania Tomasini (Prometeia, an association of econometric forecasts), who stated that global economy keeps growing, although at moderate and inconsistent rates. In 2015, instead, global gross domestic product should be close to 2.8 percent, recording another slowdown due to the weakness of emerging countries. The United States will grow by 2.5 percent and the Euro countries will strengthen their recovery, while the emerging economies will be less “enthusiastic” compared to previous forecasts, and therefore will decrease their contribution to the expansion of global trade.

This weakness will mainly affect the emerging economies of China, some other Asian country, Latin America (Brazil first) and Russia, with a significant impact on global trade that will increase by 1.5 percent only in 2015 and by 2.3 percent in 2016, in real terms.

Good news from Europe, where a weak euro is supporting the export of European countries and domestic demand trends are compensating (at least in 2015) the negative effects of a slowdown in international trade. In 2016, besides the decrease in foreign demand, Germany is going to see the impact of the Volkswagen affair on domestic economy. According to Tomasini, no rally is expected for the international prices of industrial raw materials before 2017, but the global market is still exposed to high risk factors, mainly related to the volatility of financial and currency markets, as well as the slowdown of Chinese economy and the current geopolitical tension.

 

In Italy, gross domestic product figures in the third quarter showed continued growth in the year, in line with the expected increase by 0.8 percent in 2015. Among the encouraging signs of the approaching end of the crisis, the most visible is the contribution of domestic demand to the trend reversal: the result was positive, with family consumption presumably up by 0.7 percent in real terms at the end of 2015. This adds up to investments that will finally support growth, despite an oscillating trend typical of the initial period of a rally.

Unlike the previous year, the biggest contribution to Gdp in 2015 is coming from domestic demand, while foreign demand is affected by the slowdown in export growth combined with increased import due to the recovery of domestic demand. According to estimates, foreign demand will remain negative or stable for the entire outlook period.

The rallying trend of domestic consumption in the next three years seems to be consistent, with a slightly stronger increase of private consumption compared to 2015, driven by increasing family spending capacity, still low inflation and positive effects of fiscal policy. Also investments have been increasing again during 2015, especially in machinery, equipment and transportation; the rally of investments in constructions is delayed to 2016, when initial positive signs are expected also in the residential sector, with significant impact on the furniture industry.

 

According to early forecasts in the “World Furniture Outlook 2016”, presented in Milan by Sara Colautti (Industry and Country Studies manager at Csil), global furniture consumption at production prices – i.e. net of retail markup – is estimated at 455 billion US dollar. More details can be found in the analysis of market openness (import-to-consumption ratio), currently at 28 percent, with different situations in the world’s three major regions. The Nafta countries (United States, Canada and Mexico) have a strong propensity to export, with a 72 percent share of furniture exported outside the region and only 28 percent traded internally. Asia has a different result, exporting 59 percent of furniture production outside its own region, while 41 percent is sold to countries within the region. Europe trades 76 percent of furniture production internally, while export accounts for 24 percent.

Several confirmations and little significant news from the rankings of exporting and importing countries. The list of exporting countries is still headed by China, which has doubled its export from 2009 to 2015, from 25 to over 53 billion euro, despite a falling trend in recent years. China is followed by Germany, Italy and Poland, all slightly decreasing, while place number five was taken for the first time by Vietnam. The top-five countries in the ranking of international furniture importers are the United States, Germany, France, the United Kingdom and Canada.

According to Csil report, in 2016 consumption will grow moderately, below 3 percent on a global level. The only region with more sustained growth is Asia Pacific, followed by the Middle East and Africa, and North America coming up close; lagging behind, the 28-country European region with Norway, Switzerland and Iceland; Central Eastern Europe and Russia; and just above zero, South America. These forecasts – Csil warned – should be handled with caution due to the uncertain outlook of the Chinese market.

As stated in the “Forecast report on the furniture industry in Italy”, 2015 marked the end of falling furniture consumption, thanks to the continuation of expansion policies with the government’s financial act (the furniture bonus first of all), the reduction of inflation and the increase in available income in real terms and family confidence. Export keeps growing, both to European Union markets that went back to growth in 2014, and to extra-European markets. Until September 2015, the latter did not show any reduction is Italian furniture purchases, and growth rates are remaining at higher levels than in 2014. Growing foreign sales and substantial stability in domestic sales have increased total industry turnover, an increase by approximately 1.8 percent in 2015.

The positive trend will continue in the coming years. For the Italian furniture industry, 2016 will be a year of consolidation for the trends recorded in the previous twelve months: the domestic market will show initial signs of recovery (plus 1.2 percent in real terms), supported by an ever positive trend of sales on the international markets despite declining foreign demand. Besides measures like the bonus to support home renovation and young couples, the increasing income available to families will keep playing a key role for furniture industry recovery: expected increase is 1.6 percent in real terms, with inflation still under control and expenditure rising. This positive climate will benefit also furniture from foreign sources, whereby import is expected to grow by 8 percent approximately. As to export, in 2016, the euro close to parity with the dollar, the capacity of Italian companies to diversify markets and preserve competitiveness in terms of quality/price ratio will have positive impact on furniture sales and compensate for the possible reduction of growth rates in the demand from extra-European countries. In 2016 an export growth by 4 percent at constant prices is expected.

Industry production, Colautti observed, will therefore achieve another increase by 2 percent. In 2017, domestic demand will also benefit from a rally of investments in residential constructions, an improvement of credit conditions (already starting in 2016) and unemployment rates, while at the same time foreign demand will keep developing positively, resulting into further production increase. Good prospects also for 2018, when Italian economy will grow by approximately 1.3 percent. The growth driver will be domestic demand, while the foreign trade balance will be basically stable. Wages will keep growing and family expenditure will increase at rates above 1 percent. For the furniture industry, further growth on the domestic market is expected, sustained by the elements mentioned above and by a positive trend of the job market, the recovery of real estate and renovation needs that can no longer be delayed.

 

The latest Csil observatory about “made in Italy” furniture offers an additional point of view of complex market evolution, through a specific monitoring of the strategies deployed by Italian companies related to investments in production, sales and direct operations on foreign markets. Clear evidence that the furniture industry is heating up its engines to face new expansion comes from the picture of investments in woodworking technology and machinery. Mentioning market figures processed by Acimall, Csil shows that 2015 brought a new start for machinery orders, with growth rates of 13.5 percent in the first quarter, 5.3 percent in the second quarter and 7.2 percent in the third quarter, combined with investments in research and development, process efficiency, environmental protection, communications and stronger sales operations abroad, including new showrooms and stores.