Key Findings:

  • Seventh straight decline in activity signalled
  • Return to growth of new orders …
  • … but confidence down and employment growth softens

Italy’s construction sector remained stuck in a downturn during June, with overall activity falling and across all monitored subsectors. However, rates of decline were generally weaker, and new orders registered growth for the first time since last November. Purchasing activity meanwhile was cut, but only marginally, whilst a slight increase in employment was registered. Input costs continued to rise due to a general increase in prices. Confidence in the future remained positive, though eased to its lowest since February.

The headline HCOB Italy Construction Purchasing Managers’ Index® (PMI®) – which measures month-on-month changes in total industry activity – improved in June but remained stuck below the 50.0 no-change mark. The index posted 48.6, up from 47.9 in May, and thereby signalling a decline in activity for the seventh month running.

The latest contraction in activity was again broad-based. Output fell across all monitored sub-categories, led by commercial which recorded its worst performance since January. Civil engineering registered a solid decline in activity that was similar to the pace seen for commercial. Housing recorded a seventh monthly decline in production, but the rate of contraction was marginal and the softest in this sequence.

Firms linked the latest fall in activity to previous declines in new work that have been observed since the end of last year. However, in June, there was a somewhat positive development, with new orders increasing marginally and thereby ending a six-month sequence of contraction. Panellists commented on generally higher client interest in starting new construction projects, and some success in tapping into this improved demand.

Constructors remained somewhat circumspect in their purchasing decisions heading into mid-year. Latest data showed that buying activity declined again in June, the seventh month in a row that a fall has occurred. There were reports from the survey panel that workloads remained insufficient to encourage an increase in the buying of new materials and goods. This in part reflected an uncertain outlook. Although activity is typically forecast to rise from present levels, linked in part to June’s positive demand developments, there are concerns amongst the panel that higher interest rates will weigh on construction investment. The net result was a fall in business confidence to a four-month low.

Worries about the future weighed on employment growth during June. Although firms took on extra staff in some instances, the non-replacement of leavers in several cases meant that employment growth slipped to a modest level that was the lowest in eight months. Firms also reduced their usage of sub-contractors for a second month in a row, leading to a modest increase in their availability.

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Vendor performance remained, especially in the context of severe pandemic related distortions, relatively stable in June. Still, average lead times worsened modestly, amid some residual challenges for vendors in sourcing and supplying inputs. Average input prices also rose again, with the pace of inflation accelerating since May to a three-month high. Fuel and energy remained sources of elevated costs, according to firms.

Commenting on the PMI data, Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, said, “The weakness of the Italian construction sector continued in June, according to the HCOB PMI. Another index reading below 50 points signals that the construction sector’s contraction, which according to ISTAT amounted to 3.8% MoM in April, has continued in May and June.

“The weakness of the construction sector, which expanded by just 1.4% from Q1 2022 to Q1 2023, remains comprehensive. None of the important subsectors (housing, commercial real estate, and civil engineering) succeeds in breaking free this month. The contraction in commercial real estate construction activity even marginally intensified in June compared with the previous month.

“Notably, the construction sector is still struggling more with rising input prices and longer delivery times than other sectors in Italy. However, given declining construction activity, we believe it is only a matter of time before signs of easing become more noticeable on these fronts.

“The outlook for the coming months is rather subdued. Although new orders increased slightly in June, they have experienced a continuous contraction between December last year to May. The construction industry continues to hire but significantly reduced the pace of hiring last month. And a look at the demand for residential loans, as tracked by the Bank of Italy, suggests that construction activity will continue to decline in this segment.

“State aid from the Italian government is currently not on the horizon, as it must reduce its budget deficit to below 3% of GDP by 2026 in line with EU requirements. Only the issuance of the outstanding tranche under the EUNextGeneration program could spark greater optimism.”

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