Italy Service Industry Confident About Future

The Italian service sector continued to expand during October, albeit at a slower rate amid reports of weaker sales gains. Margins also came under pressure as companies resorted to discounting to support growth in spite of a marked upturn in operating costs.

Service providers nonetheless continued to add to their workforce numbers during the month and, despite slower growth in sales and activity, were more confident about the future. Business expectations rose to the highest in 21 months during October, MarkitEconomics reported.

The headline seasonally adjusted IHS Markit Business Activity Index—which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago—fell to a one-year low of 52.1, down from September’s 53.2.

October marked a third successive loss of growth since it hit a 10-year peak in July. A similar trend was seen for new business. Despite rising for a thirty-second month in succession, new work increased at the weakest rate since last October.

Although attendance at exhibitions was indicated to have supported sales wins, companies reported having to work hard to secure new business in a more competitive and, for some firms, slower demand environment.

With this in mind, a number of service providers chose to offer discounts in a bid to stimulate sales growth. Latest data showed that average prices charged fell again in October, with the degree of price cutting the strongest seen since last November.

Margins subsequently came under pressure during the month as operating costs continued to increase.

Despite easing notably since September to the lowest level in nearly a year, input price inflation remained marked amid reports of higher vendor list prices and increased costs for energy, fuel and staffing.

Increase in Activity

The size of the Italian service sector workforce continued to expand modestly during October, the thirteenth month in succession that an increase in staffing levels has been registered by the survey.

Higher employment was linked to growth of workloads and efforts to deal with these in October. Backlogs of work rose for a thirteenth successive month nonetheless.

Finally, service providers were at their most confident for 21 months in October, with over 46% of the survey panel forecasting an increase in activity from present levels over the coming year.

Companies widely expect order volumes and economic activity to continue to rise, whilst also anticipating reaping the benefits of previous investments in marketing and new products.

Strong Manufacturing

Paul Smith, director at IHS Markit which compiles the Italy Services PMI survey, said: “October’s figures on the performance of the Italian service sector disappointed, especially in the context of the strong manufacturing data released earlier in the week.

“Our PMI surveys subsequently point to a two speed Italian economy. Whilst manufacturing is benefiting from a strong upturn in external demand for capital goods, growth in the services economy—which is naturally pivoted to domestic demand developments—is lagging that of industry.

“Key to near-term services growth will therefore be an upturn in internal demand. On this front, rising employment, allied with surging business andconsumer confidence, provides some hope and potential support for a turnaround in service sector growth in the coming months.”

Meanwhile, ISTAT's 'anticipatory indicator' on the performance of the Italian economy was up in October, Giorgio Alleva, the president of the national statistics agency, said at a hearing with the Lower House and Senate budget committees on Monday.

Alleva said that the indicator "registered a markedly positive variation (in October), suggesting that the current rates of growth will continue".

Cleaning Up NPLs

Bank of Italy Governor Ignazio Visco on Monday said that any action aimed at reducing banks' non-performing loans on their balance sheets should take into account preserving financial stability.

"Supervisors should refrain from imposing measures that de facto imply blanket sales of NPLs on banks," he said during a conference in Madrid, Reuters said.

Visco called on European banks to strengthen their clean-up of non-performing loans from their balance sheets.

The ECB's guidelines on new bad loans, announced last month, met with a fierce backlash in Italy, where the banking lobby, government, central bank and even top European parliamentarians said the new rules jeopardized economic growth and went beyond Frankfurt's remit.