The state of Italian manufacturing, according to forecast indices, is improving but still remains in contraction.
HCOB Italy’s manufacturing PMI rose to 45.3 in December 2023 from 44.4 in November, the highest reading since August and well above market expectations of 44.4. However, the current reading marks the ninth consecutive month of contractions as weak demand continues to weigh on the sector.
Both production and new orders declined, albeit at a smaller pace. New exports fell at the slowest pace in five months, while production declined the least in three months. Firms reported the presence of spare capacity but made cautious hiring decisions.
The labor force level remained unchanged after two periods of job cuts. At the same time, purchasing activity has fallen the most since June. On the price front, the deflationary trend continued. The degree of optimism for the future remained below the long-term average. Of course, deflation is a symptom of the greatest evil for the Italian economy: the lack of growth, or even stability, in domestic demand.
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Deflation is an indication of an obvious lack of growth in demand. By now, it is clear that the evil of the Italian economy is income that cannot sustain sufficient domestic demand. Without domestic demand, the productivity of manufacturing comes down, according to Kaldor’s second growth law.
The government should stimulate proven and public consumption, but European budget constraints and the inability to control monetary policy make this difficult. So there is no way in this situation to change the negative forecast for the manufacturing sector.