Italy services sector growth accelerates in September

Italy's services sector expanded at an accelerated pace in September, with the HCOB Services PMI rising to 52.5, driven by the strongest new order growth in 17 months and improving customer demand. While employment continued to grow and business confidence improved, persistent elevated input costs and rising output prices remain a factor. This domestic strength, however, contrasts with a contracting manufacturing sector and a fourteenth consecutive month of declining new export orders, indicating an increasing imbalance in Italy's economic recovery amidst weak external demand.

Analysis

Italy's economy presents a bifurcated picture as of September, characterized by a resilient domestic services sector and a faltering export-oriented manufacturing base. The HCOB Services PMI accelerated to 52.5, its tenth consecutive month of expansion, driven by the most robust growth in new orders in 17 months. This indicates strong domestic demand, which also supported continued, albeit slowing, job creation. On the inflation front, while input costs remain elevated due to salaries and energy, the pace of both input cost and output price inflation has eased, with the latter slowing to its weakest rate since November 2024. However, this services-led strength is completely offset by industrial weakness. The HCOB Italy Composite PMI remained unchanged at 51.7, masking a contraction in manufacturing output. This divergence is explained by external factors, as new export orders declined for the fourteenth consecutive month, reflecting muted demand from Europe and geopolitical headwinds. The data, therefore, points to an imbalanced recovery reliant solely on domestic consumption, with significant vulnerability to the deteriorating international trade environment.

Key Decisions for Investors

• Investors should consider a long position on domestically-focused Italian service sector companies while remaining cautious or underweight on export-dependent industrial and manufacturing names due to the clear divergence in performance.
• The easing of both input and output price inflation, despite persistent cost pressures, is a significant disinflationary signal that could support a more dovish European Central Bank stance, potentially benefiting Italian sovereign debt and rate-sensitive equities.
• Monitor the sustainability of this economic imbalance, as prolonged weakness in the manufacturing and export sectors poses a risk of spilling over into domestic business and consumer confidence, which could undermine the services sector's current strength.