6th September 2023

Key Findings:

Steepest decline in output since March
New orders down for first time in three months
Positive outlook leads to jobs growth

August saw a further deterioration in the performance of the Italian construction sector, with declines in both activity and incoming new contracts registered. Purchasing activity was subsequently cut, whilst price pressures intensified as firms continued to bemoan the inflationary impact of high energy costs. Firms nonetheless took on additional staff. This was linked in part to a positive outlook, with constructors expecting to benefit from the National Recovery and Resilience Plan in the coming months.

The headline HCOB Italy Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – remained mired below the crucial 50.0 no-change mark in August. Posting 47.7, down from 48.0 in July, the index signalled a ninth successive monthly fall in activity. Moreover, August marked the steepest decline of construction output since March.

Breaking the data down by sub-sector, commercial continued to perform the worst. Here activity was down to the steepest degree for a year with the rate of decline far sharper than seen for the housing and civil engineering categories. That said, housing still posted its weakest monthly performance since January. For civil engineering, however, the fall was marginal and the softest in six months.

The underlying weakness in overall construction activity was closely linked to a first fall in new orders placed with Italian constructors in three months. The decline was also solid and the steepest since February. Clients were said to be reluctant to commit to new contracts against the backdrop of an uncertain macroeconomic environment.

Given the lack of new orders, and dwindling activity at construction sites, firms were understandably reticent to purchase more inputs during August. Latest data showed that buying activity fell quite markedly, dropping at the steepest rate since January. Elevated prices also discouraged purchasing. Reportedly reflective of the continued inflationary impact of high energy costs, latest data showed that input costs rose sharply and to the greatest degree for six months.

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Constructors were however keen to add to their staffing levels during August. PMI survey data showed that employment rose for the tenth month in a row. Although modest, growth was also the steepest since May. Firms took on additional workers largely in anticipation of increased activity at their sites in the coming months as they signalled positive projections for the future. Optimism amongst constructors jumped sharply in August, hitting its highest level since May 2022. There were hopes of an improvement in demand and success in tenders for new work. Several panellists expect to benefit from an increase in public spending related to the National Recovery and Resilience Plan.

Commenting on the PMI data, Dr Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, said, “The Italian construction sector is currently navigating a recessionary tunnel with no visible light at its end. The HCOB PMI for overall activity, sitting at 47.7 in August, merely confirms further contraction. This condition has persisted for nearly a year now, and long-term prospects do not appear much better. The EUNextGen program, which is expected to provide Italy with €200 billion in assistance, is currently in imminent jeopardy.

“Contracting activity affects the sub-sectors of the construction industry quite disparately. Contraction has accelerated in residential and commercial construction compared to the previous month, while it has notably slowed down in civil engineering. Overall, customers in the sector appear hesitant to commit to new contracts due to the uncertain macroeconomic environment.

“In contrast to the manufacturing industry, the Italian construction sector is grappling much more severely with supply chain issues and steadily rising input prices. Companies in this sector are lamenting the shortage of essential raw materials and the increased energy costs as part of these challenges.

“The outlook is mixed. Current order inflows are once again shrinking and at a faster rate. Some boost for the sector comes from repair work following the flood damage earlier in the year. Construction companies are optimistic about future activity, likely due to the upcoming €18 billion tranche from the EUNextGen program this autumn. However, the further pending tranches are in imminent jeopardy due to ongoing disagreements between Rome and Brussels.”

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