Italy rose in the S&P Global manufacturing PMI to 52.9 in May, up from 52.1 in April and 49.2 a year earlier. It was the fourth consecutive month of expansion and the strongest reading since April 2022.
Why it matters:
- Italy’s manufacturing recovery is accelerating while several major eurozone economies lose momentum.
- Growth is being driven by a surge in new orders and precautionary stock-building by customers.
- The rebound comes alongside rising cost pressures linked to supply-chain disruptions and the conflict in the Middle East.
- Economists caution that part of the demand boost may prove temporary.
The big picture: Italy’s factories are benefiting from one of the strongest inflows of new business in more than four years, according to S&P Global data.
- Customers increased orders as they sought to build safety stocks amid concerns over supply shortages and future price increases. That, in turn, pushed manufacturers to raise production, increase purchasing activity and work through growing order books.
- The result stands out in a eurozone manufacturing sector that remains in expansion territory but is showing signs of losing momentum after a strong spring.
Zoom in: Demand drives the rebound. New orders rose at one of the fastest rates in four years, providing a significant boost to production. Manufacturers responded by increasing output volumes and stepping up purchases of inputs at the strongest pace since April 2022.
- Backlogs of work also increased for the first time in nearly four years, signaling that demand is beginning to outpace firms’ immediate capacity.
- Employment continued to grow, although hiring slowed compared with previous months.
Supply chains under pressure: The surge in activity has coincided with renewed strains on supply chains.
- “Faced with even more disruption to supply chains and greater cost pressures brought on by war in the Middle East, manufacturers in Italy are acting to mitigate any risk of production stoppages. Despite accelerated purchasing activity, efforts to build buffer stocks were unsuccessful amid greater instances of delivery delays,” said Eleanor Dennison, economist at S&P Global Market Intelligence.
- The comments suggest that part of the recent increase in purchasing activity reflects companies’ attempts to protect production from potential disruptions rather than a purely cyclical improvement in demand.
Between the lines: S&P Global suggests that some of the recent strength may reflect defensive purchasing rather than a lasting improvement in underlying demand.
- “This latest improvement in demand across the sector will likely prove unsustainable once stock-building inevitably fades,” Dennison said.
- Even so, she noted that the influx of new work was among the strongest seen in more than four years, helping support higher production levels across the sector.
Inflation watch: The manufacturing rebound is also bringing renewed price pressures. Input costs increased at the fastest rate in four years, while output prices rose at the quickest pace in three and a half years as companies passed higher costs on to customers.
- Still, S&P Global does not see a return to the inflation shock experienced during Europe’s energy crisis.
- “Although goods producers again faced another steep and accelerated increase in their average cost burdens, we are not seeing inflation hit the levels seen during the height of the 2022 energy crisis at present,” Dennison said.
- Despite rising costs, business confidence improved slightly, with firms citing expectations of new sales opportunities and a more supportive economic environment.
Zoom out: Italy versus Europe. Italy’s performance contrasted with developments elsewhere in the eurozone.
- The eurozone manufacturing PMI eased to 51.6 in May from 52.2 in April, retreating from a near four-year high. Among the bloc’s largest economies:
- Germany fell to 50.1 from 51.4, indicating near-stagnation.
- France dropped into contraction territory at 49.7, down from 52.8.
- Spain slipped to 51.2 from 51.7, with growth remaining positive but modest. S&P Global said Spain also showed signs that the stockpiling-driven boost seen earlier in the year was beginning to fade.
The bottom line: Italy’s manufacturing sector is currently outperforming much of the eurozone, powered by strong order growth and inventory-building. The key question is whether that momentum can endure once precautionary stockpiling subsides and higher costs continue to work their way through the industrial economy.
