Italy Service Sector Woes Continue As New Work Drops at Fastest Rate Since March 2009

Steven Bobson, Europe & Americas Editor
August 07, 2012 /

Conditions across Italy’s service sector took a turn for the worse in July, as incoming new business fell at the fastest rate since March 2009.

Activity and employment both dropped as a result, and for the first time since the launch of the survey in January 1998 firms generally expected output to be lower in a year’s time than current levels.

Another negative development for businesses was a slight rise input
price inflation from June’s seven-month low.

At 43.0, broadly unchanged from 43.1 in June, the seasonally adjusted Markit/ADACI Business Activity Index indicated a further marked decrease in Italian service sector output during July. That extended the ongoing period of contraction to 14 months.

Behind the latest decrease in activity across the sector was a sharp and accelerated reduction in new business during July. The rate of decline was the steepest since the depths of the 2008/09 recession. Factors that weighed on demand included a lack of liquidity and generally low levels
of confidence among clients, according to reports from panellists.

Italian service providers were pessimistic with regards to the prospects of output levels rising over the coming year in July – the first time sentiment in the sector has been negative in over 14-and-a-half years of data collection. Reasons provided by companies anticipating declines in activity at their units included low levels of investment across the
wider economy and higher tax burdens.

Outstanding business at services firms was further reduced during the latest survey period, extending the current sequence of decline to 17 months.

Moreover, the overall rate of depletion quickened to the fastest since September 2009. Weakness in new business inflows was the most frequently cited reason for lower backlogs.

After slowing in June to the weakest for seven months, input price inflation increased slightly during July. Respondents suggested that a
combination of rising energy bills, increased fuel prices and higher taxation had driven average costs up over the month. That said, inflation was still weaker than the historical trend.

Weakening demand saw service providers shoulder the burden of higher costs and drop selling prices for the twelfth straight month. The rate of decline was the slowest since January, though still solid overall.

Finally, July saw employment levels reduced for the fourteenth month running in line with lower workloads and rising costs. The rate of job shedding across the sector was solid, and the fastest since April.

Phil Smith, economist at Markit and author of the Italy Services PMI® said: “July PMI data pointed to recession in Italy’s service sector deepening at the start of the third quarter.

“New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred around the height of the global financial crisis.

Furthermore, data on expectations showed sentiment at a record low,
and gave no impression of an impending recovery.”

“Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June’s recent low. This placed greater pressure on service providers to reduce their overheads, with a solid and accelerated decrease in employment
levels one outcome. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts.”


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