Despite signs of continued weakness in underlying demand, Italian services firms managed to maintain activity growth in January. The increase in output lost momentum and was only marginal, while new business volumes fell for the third month in a row. Confidence in the 12-month outlook for activity also fell to its lowest since October 2023.
Italian services providers faced greater inflationary pressures at the start of 2025, driven largely by wage increases. This prompted firms to increase their fees. As a result, inflation in both costs and fees rose to a nine-month high. Another way firms sought to protect profit margins was by cutting their headcount. This was the first round of job losses in three months.
The headline indicator from the report, the HCOB Italy Services PMI®, fell to 50.4 in January from 50.7 in December. Consistent with only a partial rate of growth, the recent uptick in activity was muted when put into historical context. While some panelists linked the rise in output to new customers, others were challenged by adverse economic conditions.
A key factor limiting activity growth was the continued decline in new business volumes, which fell for the third month running in January. Anecdotal evidence suggested that firms noted a slowdown in demand and increased customer uncertainty. The pace of decline in new business was little changed from that seen at the end of 2024 and was only marginal overall.
A strong decline in international sales in January was responsible for the reduction in total new orders. This came amid reports from panelists of difficult economic conditions in trading partners. Although the decline in export sales lost some momentum from December, the decline was significant compared to the long-term series average.
Inflation was sharp and the most pronounced since April last year
Italian services firms opted to cut their staff numbers in January, ending a two-month period of growth. While the decline in payrolls was modest in nature, it was the strongest since August 2023. Survey respondents reportedly made some layoffs and failed to replace employees who left their jobs. Another factor that pushed firms to reduce their capacity was lower expectations for business activity over the next 12 months.
While optimism remained positive, it fell to a 15-month low and was noticeably muted by historical standards. Firms that expected output to rise from current levels pinned this on hopes of improved economic conditions, increased marketing efforts, and new customer acquisitions. However, Italian service providers continued to point to excess capacity, with pending work falling for the 16th consecutive month. In fact, the rate of depletion was the fastest in three months and slightly faster than the series average.
Wages remained the main source of cost pressures in January, panelists reported. Although there were also indications of higher raw material prices and higher service charges. Inflation was sharp and the most pronounced since April last year. Later, the story was similar for average prices charged across the sector. There was a rebound in fee inflation to its strongest level in nine months, as companies sought to pass on higher cost burdens to customers.
Commenting on the final PMI data, Jonas Veldhuizen, associate economist at Commerzbank Hamburg, said:
“The fact that GDP stalled again in the last quarter, after stagnating in the third quarter, highlights the slowdown in economic development in Italy in the second half of 2024. This trend is in line with the HCOB composite PMI, which averaged 49.9 from July to December 2024. With 50 as the threshold between growth and decline.
The Italian private sector is still in contraction at the start of 2025
The latest HCOB Purchasing Managers’ Index (PMI) for the Italian private sector economy suggests that the slowdown is here to stay. The composite output index hit the bottom of contraction territory, continuing a recent downward trend.
“Activity in the Italian service sector remains within growth territory, but only marginally. Underlying demand remains weak and has worsened again, with new orders falling both at the aggregate level and from foreign customers. Panelists reported that uncertainty and weak economic conditions abroad are holding back demand. This weak demand translates into further declines in existing business. This bleak picture leaves the outlook for service providers below the long-term average:
“Service input price inflation could become a more significant concern. Input price inflation is accelerating and has reached a high level, which is sounding alarm bells. Firms are passing on these higher input costs, with wages still playing a major role, to customers through higher selling prices, as reflected in the data. At the latest ECB meeting, Lagarde expressed confidence that wage increases in the services sector were on their way down. However, she will not be happy with the latest PMI data.”
At 49.7, the HCOB Italy Composite PMI remained partially in contraction territory, unchanged on the month. The slowdown in services growth was offset by a softer decline in industrial output.
Total new work fell at a moderate pace in January and was slightly faster than in the previous survey period. This reduced employment levels in both broad sectors. However, there are still signs of excess capacity as total outstanding work fell strongly in January. Although this was more pronounced in manufacturers, both sectors recorded stronger rates of arrears depletion than those seen at the end of 2024.
Output price trends diverged
Input price inflation was strong across the Italian private sector in January and the strongest in eight months. Both manufacturing and services firms reported greater cost pressures on the month. At the same time, output price trends diverged as manufacturers cut their prices more sharply, while services firms were more aggressive in setting their prices. The overall rate of inflation in selling prices was moderate and at a nine-month high.
