HCOB Italy Construction PMI: New Orders Placed at Italian Firms Down Sharply in July

Key Findings:

• Activity and new orders both contract at quickest rate for 23 months
• Fastest decrease in purchasing activity for a year-and-a-half
• Cost pressures intensify and optimism fades

The Italian construction downturn deepened at the start of the second half of the year. Firms reduced their activity in line with subdued new order inflows, both of which fell at the quickest rates for nearly two years.

There were signs that firms were looking to protect cashflow in July as purchasing activity was reduced at the quickest rate for 18 months and job shedding returned, albeit only marginally. Stronger cost pressures were also likely to have deterred firms from buying additional inputs.

The headline HCOB Italy Construction Purchasing Managers’ IndexTM (PMI®) – which measures month-on-month changes in total industry activity – slid further into contraction territory at the start of the second half of the year.

Down from 46.0 in June to 45.0 in July, the headline figure pointed to the sharpest reduction in activity seen for nearly two years. The marked downturn was largely linked by panellists to subdued construction demand.

Following a renewed drop in commercial building activity, all three monitored sub-sectors of construction recorded declines in July. Most notably, the main drag on total activity was residential building which fell sharply and at the quickest since the first pandemic lockdown.

Italian construction firms faced challenging demand conditions as the downward trend for new orders deepened again in July. A quarter of firms registered a drop in new work, compared to 16% recording an improvement. As well as being marked, the deterioration picked up to a near two-year high. Some firms in particular blamed a drop in new public tenders.

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Companies meanwhile adjusted their purchasing quantities in line with reduced activity schedules in July. The latest decrease in input buying was strong and the most pronounced for a year-and-a-half. Where firms purchased inputs, delivery times lengthened again in July. The deterioration reflected constraints at suppliers, according to panel member reports.

Despite the reduced demand for inputs, cost burdens picked up in July. Input price inflation was strong and linked to increased raw material costs. That said, cost inflation remained subdued by historical standards.

Employment was another area in which construction firms looked to cut costs in July. Though only fractional, the recent round of job shedding was the second this year so far. Notably, the usage of subcontractors also dropped at the strongest rate seen for 22 months.

Finally, sentiment towards future activity among Italian constructors was notably less positive at the start of the second half of the year. The degree of optimism was its weakest for nearly two years. Some firms were confident that demand conditions would improve, while others were doubtful.

Commenting on the PMI data, Jonas Feldhusen, Junior Economist at Hamburg Commercial Bank, said, “The latest HCOB PMI data signalled a weak start to the second half of the year for Italy’s construction sector. The primary factor driving this downturn was collapsing demand. July marks the fourth consecutive month of declining demand, with the rate of decline accelerating for the second consecutive month, as indicated by the New Orders Index. Correspondingly, companies are reducing their purchases of intermediate goods. It is therefore unsurprising that the utilisation of subcontractors is declining, reaching nearly a two-year low. Subcontractor rate increases have somewhat cooled down. All these factors contribute to plunging sentiment in the construction industry.

“The contraction across Italy’s construction sector was broad-based, affecting all monitored sub-sectors. The housing sector experienced the most severe downturn, with activity levels dropping at the fastest pace seen since the height of the pandemic. The commercial and civil engineering sub-sectors are also facing grim conditions. The commercial sub-sector, after two months of marginal growth, has now re-entered contraction territory. The civil engineering sub-sector has been contracting for five months.

“After the end of the Superbonus program, the situation in Italy’s construction sector is exacerbating. While we anticipate another interest rate cut by the ECB in September, which would naturally benefit the construction sector, it is doubtful that this decision will provide a significant boost. Therefore, we expect the recession in the construction sector to persist.”

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