The Service Sector Driving Growth in Italy
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The service sector is driving Italy’s growth
The weakening in industry temporarily leaves the onus of growth on services. Demand wise, expect consumption to benefit from resilient employment and decelerating inflation. Investments will reflect better progress (or the lack thereof) in the implementation of the European Recovery and Resilience funds.
First quarter consumption driven by a strong recovery in purchasing power
The surprisingly strong 0.6% quarter-on-quarter GDP growth between January and March this year was driven by domestic demand. The relative strength of consumption was due to a 3.1% quarterly rebound in households’ real purchasing power, which benefited from the slowdown in inflation dynamics. The resilient labour market, with employment up and unemployment and inactivity down on the quarter, was apparently a decisive factor. Conditions were there for households’ saving ratio to reach 7.6% (from 5.3% in the fourth quarter of 2022), close to the pre-Covid 8% average, without penalising consumption.
Weakening industry points to softer growth in the second quarter
Data for the second quarter suggests that the very good performance of the first will be hard to replicate. Industry just managed to propel value-added in the first quarter, but this seems highly unlikely in the second after a very disappointing -1.9% industrial production reading in April.
Business confidence data for May and June and the relevant PMIs point to manufacturing softness through the rest of the second quarter and, possibly, into the third. For the time being, the decline in gas prices has failed to provide any relevant supply push for manufacturers, outweighed by deteriorating order books and stable stocks of finished goods. Services are also signalling some fatigue, but still look to be a decent growth driver, helped by a strong summer tourism season.
