Italy’s export-dependent factories thrive but Spain lags behind

Italy’s manufacturing activity grew more than expected in January as its factories benefited from rising demand for exports to Asia, but the consumer-focused Spanish manufacturing sector slid back into decline, according to a widely-watched business survey.

The IHS Markit purchasing managers’ index for Italian manufacturing rose to 55.1 in January, from 52.8 in the previous month. 

The figure was higher than the 52.4 forecast by economists polled by Reuters, and marked the eighth consecutive month that the reading has been above the 50 mark, which indicates a majority of businesses reported improving conditions. 

Italian factory output growth was the fastest for three months, with strong incoming orders and rising employment.

By contrast, the Spanish IHS Markit manufacturing PMI fell to a seven-month low of 49.3, down from 51 at the end of last year and underperforming economists’ expectations.

The contrasting performances illustrate how the resilience of European manufacturing since the start of the coronavirus crisis is benefiting some countries more than others.

Chris Williamson, chief business economist at IHS Markit, said: “Having been squeezed, business investment is coming to life again on expectations that the second half of this year will see much higher levels of demand as the economy picks up, which is why we are seeing more exports of machinery and equipment to Asia.”

Machinery and equipment comprise 13 per cent of Italian manufacturing by value, compared with only 4 per cent in Spain, according to Eurostat. “So Italy is supported more than Spain by the relatively strong Chinese economy,” said Steven Trypsteen, economist for Spain and Portugal at ING.

Spanish factories are more focused on making consumer goods, which Mr Williamson said were “still being hammered” by the fallout from the pandemic. 

Spanish manufacturing output “declined slightly in January due in main to the sharpest reduction in new work since last May”, IHS Markit said. It added that export orders and employment were also down, while heavy snowstorms this month “weighed on both production and demand”.

Nikola Dacic, economist at Goldman Sachs, said that despite the weakening performance, “Spanish manufacturers remain optimistic about 12-month-ahead output levels, with only a moderate easing of the expectations index to a level similar to that from January 2019”.

Italy is the eurozone’s second-largest manufacturing producer after Germany.

“At an early stage of the recovery like this, you would expect it to favour stronger exporters like Germany and Italy as you initially see companies spending more on business equipment,” said Mr Williamson. 

Manufacturing has helped Italy to limit the economic damage from Covid-19 restrictions; Italian unemployment rose slightly to 9 per cent in December, but that is still below its pre-pandemic level.

The stronger-than-expected Italian reading and marginal upward revisions for France and Germany helped to confirm that eurozone manufacturing output expanded in January, recording a PMI of 54.8.

But both Spanish and Italian manufacturers reported rapidly rising freight costs and lengthening delivery times because of disruption in global supply chains, IHS Markit said.

While these pushed up input costs for manufacturers, they boosted the PMI scores for both countries because longer delivery times are usually an indicator of busier factories.