Italy’s Factory Slump Continues in January, PMI Signals Fragile Outlook

Summary

Italy’s manufacturing sector remained in contraction for a second straight month in January, with the HCOB PMI showing a marginal improvement to 48.1. While declines in output and new orders eased, a sharp spike in input costs to a three-year high has emerged as a new threat to factory margins. Despite the slump, business confidence hit a 4.5-year high, prompting the first increase in hiring since late 2025.

MILAN — Italy’s manufacturing sector stayed in contraction for a second consecutive month in January, underscoring a fragile industrial environment even as record-high business optimism sparked a surprise return to hiring.

The HCOB Manufacturing Purchasing Managers’ Index (PMI) for Italy edged up to 48.1 in January from 47.9 in December, matching analyst expectations. While the reading remains below the 50.0 mark that separates growth from contraction, it suggests the sharp downturn seen at the end of 2025 is beginning to stabilize.

Slower Declines Offer Limited Relief

The “softening” of the downturn was visible across the survey’s sub-indices:

• The new orders index rose to 47.4 (from 47.0).
• The output index improved to 47.1 (from 46.8).

“Italian manufacturing began 2026 still in contraction, yet January’s survey data offered tentative signs that the sector may be edging toward firmer ground,” said Nils Müller, economist at Hamburg Commercial Bank. However, he warned that demand remains “fragile at home and abroad,” with firms continuing to report order cancellations.

The Inflation Sting: A New Risk for 2026

A concerning development in the January data was a sharp resurgence in cost pressures. Input prices rose at the fastest pace in over three years, driven by higher costs for raw materials like metals and wood. This forced manufacturers to raise their own selling prices for the second time in three months, potentially complicating the European Central Bank’s inflation outlook and squeezing Italian factory margins.

Hiring Returns Amid 4-Year Confidence High

In a rare bright spot, the employment sub-index climbed to 50.6, moving back into expansion for the first time in four months. Manufacturers are primarily hiring for permanent positions, a move backed by business confidence reaching its highest level in nearly four-and-a-half years. This suggests that despite current weak demand, firms are “positioning for a recovery” later in 2026.

Broader Economic Backdrop

Italy, the euro zone’s third-largest economy, grew by a preliminary 0.7% in 2025, slightly outpacing earlier government estimates. For 2026, the government is targeting 0.7% growth. While services—boosted by tourism and preparations for the Milano-Cortina Winter Olympics—remain the primary engine, ISTAT data from last week suggests industry and agriculture also contributed to a stronger-than-expected 0.3% GDP rise in Q4 2025.

Why This Matters

• Margin Squeeze: Rising input costs at a three-year high could hurt profitability if firms cannot fully pass costs to consumers.
• Labor Resilience: Sustained hiring in a contraction suggests a “labor hoarding” strategy or genuine optimism for a H2 2026 rebound.
• Uneven Recovery: While the industrial slump is “easing,” it is not yet “reversing,” leaving the 2026 growth target vulnerable to further global trade shocks.

FAQs

Q1: Is the downturn getting worse?

No. The rate of decline in production and orders slowed in January, indicating a “bottoming out” process rather than a deepening recession.

Q2: Why are prices rising if demand is weak?

Supply chain stability is returning, but the cost of raw materials (metals/wood) has spiked, forcing factories to defend their margins by raising prices.

Q3: Does the hiring mean the sector is healthy?

Not necessarily. It reflects “long-term optimism” and a need for permanent staff, but these gains could be reversed if the 48.1 PMI doesn’t cross back above 50.0 by the spring.