S&P Global Italy Construction PMI: Fastest Fall in Activity in Four Years in August

Key Findings:

• Rapid reductions in work on residential and commercial buildings
• Purchasing activity down sharply amid solid drop in new orders
• Trend of job creation sustained as sentiment improves, but subcontractor usage falls steeply

August PMI® data signalled a steep decline across the Italian construction sector, with activity down sharply amid a solid dip in sales.

The downturn was largely centred on the housing and commercial sub-sectors, while civil engineering activity decreased only modestly. A sharp reduction in purchasing volumes failed to ease pressure on supply chains but inflation did soften. Recruitment activity remained modest, while the usage of subcontractors decreased rapidly.

From 49.1 in July, the headline Italy Construction PMI® Total Activity Index — which measures month-on-month changes in total industry activity — dropped to 41.7 in August.

The latest reading was consistent with a steep decline in construction activity that was the strongest in four years and elevated by historical standards. While a number of firms linked the fall to a drop in orders and reduced customer interest, some noted blockages due to permits and staff shortages.

Of the three monitored areas of construction, housing and commercial both signalled rapid falls in activity from July. While work on civil engineering projects decreased, the contraction was far softer and only modest in nature.

Reversing July’s brief uptick, the overall volume of new work decreased for the fifth time in six months in August. The rate of decline was broadly in line with that seen in June and solid in nature. Respondents suggested that uncertainty levels were high at customers due to the current geopolitical climate and the end of the National Recovery and Resilience Plan (PNRR).

Input requirements were lower and firms reduced their buying levels again in August. The rate of reduction was the strongest in just over three-and-a-half years and sharp in nature.

The fall in purchasing was not sufficient to relieve pressure on supply chains, however. Average lead times on inputs lengthened to the most notable degree in four months and sharply. Material shortages and courier delays were noted by panellists in the qualitative part of the survey.

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Reduced demand for inputs did, however, help to dampen cost pressures, with average operating expenses rising at the softest rate since the start of the year. Although substantial, the rate of cost inflation was softer than the long-run trend. Where input costs did increase, firms reported paying more for raw materials, oil, transportation and fuel.

The drop in demand failed to derail the trend of jobs growth across the sector during August. Hiring activity, unchanged from July, was only slight overall, however. While employment continued to rise, firms did lower their usage of subcontractors at a sharp and elevated rate.

Business sentiment returned to positive territory in August. Strong order pipelines and marketing efforts supported upbeat projections. Despite being the strongest since February, the level of confidence was below trend amid worries around the impact of the end of the PNRR. Ongoing geopolitical tensions, limited investment and lower order numbers were also noted as causes for concern.

Eleanor Dennison, Economist at S&P Global Market Intelligence, said, “The Italian building sector experienced its sharpest contraction in activity in four years in August amid rapid reductions in work on residential and commercial properties. The drop in output reflected a renewed contraction in new order volumes.

“The response from construction firms with respect to employment is encouraging, however. With growth expectations back in positive territory amid upbeat sales pipelines, firms continued to recruit additional staff at a steady rate.

“A widespread reduction in subcontractor usage and a sharp drop in buying activity showed that firms were acting to protect margins. Lower demand for inputs likely played a part in keeping cost pressures to a minimum.”

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