From data collected during the PMI® survey in October, the Italian service sector remained mired in shrinking territory, indicating a faster rate of decline in economic activity. The main reason for this continuous decline is related to the faster decline in new orders since last June. The interviewed companies linked the decline in the flow of orders and production to weak customer demand, due to the new restrictions implemented to combat the Covid-19 pandemic. As a result, the industry continued to shrink staff and at an accelerated rate over the month.
Falling in October to 46.7 from 48.8 in September, the main index of this report, that is the seasonally adjusted Index of Economic Activities, which with a single question asks the monitored companies to compare the trend of the current month's activity compared to the previous one, recorded the minimum value in four months. This value indicates a strong contraction in tertiary production.
Weakening demand was weighing on the services business, as the flow of new orders declined for the eighth consecutive month and at the highest rate since June. The comments gathered linked this latest contraction to weak demand caused by the Covid-19 pandemic.
Foreign orders also slowed down the performance of the sector, as international demand in fact decreased considerably. The sample companies reported a weakening in foreign orders caused by the restrictive measures implemented globally. It must be said, however, that the reduction rate was the slowest since February.
The sample interviewed consequently continued to record a decrease in employment in October. The layoff rate accelerated during the month, reached its highest level since July and was mainly attributed to the failure to replace resigning staff.
Nonetheless, the level of backlogs in October continued to decline. The companies participating in the survey said that weakening sales made it possible to concentrate resources on orders not yet completed. Furthermore, the rate of contraction of orders in stock was consistent and the fastest since May.
Meanwhile, October's profit margins came under further pressure as the industry continued to discount average rates in an effort to stimulate sales, despite rising costs. The selling price deflation rate was sizeable, although it indicated the slowest pace in eight months, while the latest purchase price increase was the fastest since July and moderate overall.
With regard to future expectations, the business outlook for the next twelve months for the Italian tertiary sector remained optimistic overall. Although it remained well above the neutral threshold of 50.0, the Future Assets Index fell significantly from its 30-month record in September, marking the lowest value since May. The monitored sample expressed concern about the duration of the pandemic, the consequent restrictive measures adopted and the timing of any economic recovery.
From 50.4 in September, the Composite Production Index fell to 49.2 in October, again signaling declining values in private sector production. From a sector point of view, the more rapid contraction in tertiary activity offset the sharp rise in manufacturing output.
The key reason for this general contraction seen in October was yet another drop in new orders, which indicated an overall marginal rate of decline.
Private sector companies, due to weak demand conditions, reduced their headcount at a faster rate than in September. Nonetheless, the level of back orders declined for the 28th consecutive month, at a generally high rate of contraction.
At the same time and over the course of the five-month inflationary sequence, the cost pressure of Italian private sector firms has increased faster and at an overall high rate. Average selling prices, however, fell again and at the slowest rate since February, albeit remaining strong.
With regard to future expectations, the confidence of companies on production in the next 12 months indicated moderate values in October. While overall optimistic, the confidence level was the lowest since May and subdued compared to the long-term historical series.
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