Italy is still facing mixed developments but is likely to take advantage of the ongoing decrease of inflation.
The Composite PMI weakened to 48.2 (-0.7pp) in August due to a sharp decline in the Services index, which crossed the contraction threshold for the first time in 2023 (49.8, -1.7pp). The Manufacturing sector reported a fifth consecutive month in contraction, despite a slight upturn (45.4, +0.9pp). Improved production conditions (delivery times, input prices) were not matched by either a brighter outlook or sustainably higher output. This is reflected by the decline in the value added of the sector in the national accounts for four quarters in a row.
Employment has displayed resilience despite the economic slowdown, with the unemployment rate standing at 7.6% in July (-0.3pp YTD), although the month was statistically disappointing (+0.1pp). This is well below the pre-Covid levels, but structural weaknesses remain, such as the differential in employment and participation rates between men and women (about 18pp). The basic hourly wage growth slowed to +3.2% y/y in July (-0.1pp) but still narrowed the gap with the price growth.
The good news lies in the significant ease of inflation over the summer, as HICP decelerated from 6.7% y/y in June to 5.5% in August and turned closer to the Eurozone average (5.2% y/y, whereas the gap reached 3.1 pp in December 2022). These positive developments are further reinforced by the underlying inflation (4.0% y/y), which is significantly lower than the Eurozone overall (5.3% y/y). Besides, Italian inflation is expected to be close to the 2% target in Q4.
This should bolster household sentiment which, despite a slight summer dip (106.5 in August vs. 108.6 in June), stands above the past year average (100.7). This contrasted with the downward trend in business sentiment (97.8 in August, -1.3 pp monthly).
Finally, the combination of a downturn in investment (-1.8% q/q) and a subdued private consumption, amid higher prices and interest rates, resulted in a surprise contraction of GDP in Q2 (-0.4% q/q), amplified by the negative contribution of public spending (-1.6% q/q). This could constitute a technical backlash following the good Q1 figure (+0.6% q/q), which is in turn likely to prompt a rebound in Q3, and thereby allow the country to escape a technical recession.
Anis Bensaidani
