Business conditions in Italian industrial sector improved at fastest pace since May 2007

Business conditions in the Italian goods producing sector improved at the fastest pace since May 2007 in July. This 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, rising from 54.3 to 54.4. The improvement was primarily driven by an acceleration of output growth, and the first rise in employee numbers since early 2008. Although new business growth slowed, it remained considerable with strong rises seen both overall and from export markets.

Italian manufacturers reported a sharp rise in production levels at their plants during July. The increase was the joint-fastest since May 2007 and the 10th in as many months. Robust growth in sales volumes was often cited as the principal driver.

Meanwhile, survey respondents reported that rising demand, notably from existing clients, had acted to raise overall new order levels for the tenth straight month during July. Although new order growth moderated slightly since June, it remained marked.

Latest data also highlighted strong growth in export orders, with new business from abroad rising for the ninth straight month. Indeed, the increase was sharper than recorded for new business overall. Improving demand from key export markets was widely commented on. There was also evidence that the ongoing weakness of the euro played a part in supporting export sales.

Strong demand and rising production levels led Italian manufacturing firms to raise headcounts in July for the first time since January 2008. The increase was nevertheless marginal and centered entirely on the investment goods sector.

Reflecting rising workloads, Italian goods producers depleted backlogs of work at the weakest pace since August 2007 in July. Nonetheless, the latest decline extended the current period of backlog reduction to three years, with a number of manufacturers continuing to report spare capacity.

Average cost inflation eased to a five-month low in July. Nevertheless, input prices continued to rise at a considerable pace. Higher raw material costs coupled with unfavorable exchange rate movements were frequently commented on. There was also evidence from the survey that supply-chain bottlenecks (highlighted by a steep lengthening of supplier delivery times) had placed upward pressure on costs.

The deterioration in vendor performance was precipitated by an eighth consecutive rise in Italian manufacturers’ demand for inputs. Respondents indicated that higher production levels and efforts to re-stock warehouses had driven the latest rise in purchase volumes.

Andrew Self, economist at Markit and author of the Italian Manufacturing PMI, said: “The Italian manufacturing sector entered the second half of 2010 on a solid footing, with production growth accelerating and staff numbers rising for the first time in 2.5 years. The ongoing weakness of the euro also remains a boost to Italian exporters. However, evidence that growth in global trade flows is slowing, and the imminent implementation of government austerity measures across much of Europe highlight just some of the headwinds faced by Italian manufacturers.”