Boost for Italian economy as investment climate starts to warm

If there is any hope for the ailing Italian economy, it may lie within the white hallways of a midsized pharmaceutical manufacturing plant near Latina, 50 miles south of Rome.

Last year Janssen, a unit of Johnson & Johnson, invested €500,000 in a new machine capable of producing up to 70,000 capsules an hour, compared with 17,000 using older machinery. The equipment is being used to churn out Olysio, a new hepatitis C medicine, to meet demand in Italy and abroad.

Janssen's decision to renew its equipment could be a sign of wider change. After more than six years of economic stagnation and recession that forced companies to put the brakes on capital spending plans, confidence is growing that Italian investment may be on the cusp of a revival.

"We're a grand example," says Massimo Scaccabarozzi, president of Janssen Italy and Farmindustria, Italy's top pharmaceutical lobby group. "This is a very important sign of recovery and it should give a sense of stability to this country."

Any rebound in investment in Italy this year would come from a depressed starting point. Italian gross fixed capital formation (a common measure of investment) is close to its lowest levels in nearly two decades, though it increased very slightly, by 0.2 per cent, in the fourth quarter last year.

Investment levels are also worse in Italy than in most of its peers. According to a Eurostat analysis, they fell from a base of 100 in 2010 to 81 in 2014, while they remained flat in France and increased in Germany, the UK and the US over the same period of time.

But there is widespread hope that things are changing. Plunging oil prices have shrunk energy expenses, while the launch of quantitative easing by the European Central Bank has led to a fall in the euro, boosting exporters and promising to keep borrowing costs low for some time.

In 2015, economists expect Italy to post growth in gross domestic product - of at least 0.5 per cent - for the first time in three years. And Italian business confidence, a leading indicator for new investments, hit its highest level in seven years in March.

"The situation of companies is improving," says Paolo Mameli, a senior economist at Intesa Sanpaolo. "This is not a false signal. This time we are at a turning point." Still, there is plenty of nervousness that, as in the past, a bump in confidence will fail to translate into concrete investment plans - especially since the Italian economy remains riddled with structural deficiencies, from a byzantine justice system to high levels of corruption.

A shudder was felt when industrial production data for January showed a drop that defied predictions of a rebound. Most economists dismissed the poor numbers as the result of distorting holidays at the beginning of the year, and purchasing managers' indexes of industrial activity have since been encouraging and rising.

But concern remains that once hard data comes through for the first quarter, any optimism will dissipate. A small increase in Italy's jobless rate, to 12.7 per cent in February after two consecutive monthly declines, added to worries that any rebound is likely to be weak and uneven. And it is mainly Italy's big exporters that are able to invest with confidence, while those mostly dependent on weak domestic demand, including the country's myriad small and medium-sized enterprises, remain constrained.

"You have to invest in order to stay in the market: you can't wait for revenues to come back, you have to grab them," says Amelia Feragnoli, a producer of ready-made salads and vegetables in Terracina, near Latina, that serves mainly the region around Rome.

The family-owned company experienced a drop in business during the recession, and Ms Feragnoli says it lacked "the capacity to make large investments coming from such difficult years". She says demand for her products has now stabilised and her goal is to build more greenhouses to cultivate the baby leaf salads that are among the fastest-growing segments of her business.

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Furthermore, some investments are better than others, says Marcello Messori, a professor of economics at Luiss University in Rome. Ideally Italian companies would put any excess cash into the most high-tech upgrades, even at the expense of low-skilled workers, he says, adding: "We have to pick those investments that reboot productivity. The lack of productivity is the real drama of this country."

Back in Latina, Mr Scaccabarozzi believes Janssen is doing just that. "Often the Italian pharma industry is criticised for producing old drugs - which are part of the history of medicine," he says. "But that's not the case here."

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