Italian industrial production data has shown something of a see-saw pattern over the summer. Figures for August, which showed a 0.2% increase over the month from -0.7% in July, confirmed that pattern. Production is now just 0.6% higher than in December 2019 in pre-Covid times.
The monthly increase was driven by consumer goods (+1.2%), while investment goods (-0.1%), intermediate goods (-0.9%) and energy (-2.2 %) contracted. At the sector level, within manufacturing, only pharmaceutical products (+18.3%) and transportation equipment (+5.7%) now show positive gains in year-on-year terms. The others are all in negative territory, with wood and paper (-22%) and textiles and leather products (-12.8%) the worst performers. The collapse suggests that the normalization of supply chains has had a positive effect on production and that energy-hungry sectors remain vulnerable, given recent changes in the international context.
Looking ahead, it appears that the decline in production may be stabilizing, but we do not believe a sustainable recovery is yet underway. Business surveys in September continued to show weak domestic and foreign order books, with companies reporting rising inventories of finished goods. Apparently, the lack of demand is becoming an obstacle to production. This is not the best combination to generate a production acceleration during the summer months. It’s true that the manufacturing PMI posted a modest monthly gain in September, but at 46.8, it still remains in contraction territory.
From June to August, production increased 0.4% compared to the March-May period. A flat reading in September would result in fairly stable production during the third quarter. If this is the case, the responsibility for growth during that period will likely fall on services – particularly tourism services – and construction. Unfortunately, the available tourism data does not allow us to draw a clear conclusion about the past summer season; It seems to have been successful in the case of international flows, but not so much in the case of internal flows.
On the construction front, the final rush to complete works benefiting from generous expiring tax incentives should have continued to support activity through the summer, with a possible positive influence on GDP. We believe the combination of these factors could allow a return to very modest positive GDP growth in the second quarter, helping Italy avoid a technical recession. But this would be of little consolation as the atmosphere remains one of economic stagnation. Slow growth and higher interest rates for longer are not the best combination to allay growing concerns about debt sustainability.