Italian manufacturing recovery continued, albeit at weaker pace

Markit Research

The recovery in the Italian manufacturing sector continued in May, according to latest survey data. This was signaled by continued rises in output, new orders and input buying. However, the pace of improvement in the sector eased, as rates of expansion of production and incoming new business levels both slowed since April. Panelists also reported that supply-chain pressures continued to build, which in part led to another sharp rise in average input costs.

The overall improvement in conditions was signaled by the seasonally adjusted Markit/ADACI Purchasing Managers’ Index (PMI) – a composite indicator designed to provide a single-figure snapshot of manufacturing performance – posting 54.0. Although marginally below April’s reading (54.3), the index signposted a solid monthly improvement in business conditions.

A key driver of improving business conditions remained output growth. The latest expansion was the eighth in succession, albeit the weakest in three months. Survey respondents widely linked the rise to new order growth. The need to repopulate inventories of finished goods was also cited as a driver.

Despite underlying unrest in market conditions across the euro area, Italian manufacturers reported an eighth straight rise in new business levels during May. Although slower than reported in both March and April, the pace of new order growth remained robust. Firms reported that strong demand and restocking at clients led to May’s increase in new business levels.

There was evidence, however, that demand growth was centered on export markets. Highlighting this, new orders received from abroad rose at the fastest pace since June 2006. Panelists linked the increase to improving global demand and the depreciation of the euro against major world currencies.

The weakening of the euro, compounded by soaring global raw material prices and a considerable build-up of supply-chain pressures led to a sharp rise in average input costs in May, which inflated at the second-fastest pace since September 2000. Average costs have risen continuously since September 2009.

Rising costs forced a number of manufacturers to increase their charges during May. Average output prices have risen in each of the past three months, although the pace of charge inflation slowed since April.

Despite another considerable rise in activity, Italian manufacturers’ stocks of finished goods were depleted again in May, while backlogs of work declined at the weakest pace since September 2007.

The need to raise production levels subsequently limited the pace of job losses in the sector to the weakest since August 2008. Ongoing company restructuring was frequently cited at the driver of job cuts.

Andrew Self, economist at Markit and author of the Italian Manufacturing PMI, said: “These data indicate that the recovery underway in the Italian manufacturing sector continued at a solid pace in May, with output and new business rising at robust rates. Nevertheless, the recovery appears to be facing headwinds with output and new order growth slowing since April. Soaring raw material costs, compounded by a weakening euro will also be hitting Italian manufacturers’ profitability.” 

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