Mixed signals from May Italian confidence data

The lingering disruption in oil trade due to the quasi-closure of the Strait of Hormuz continued to weigh unevenly on Italian confidence indicators in May.

After falling sharply in April, consumer confidence rebounded in May, recovering half of the lost ground. Yet it remains well below the January and February levels. Most sub-indices improved, except the evaluation of the current economic situation. At the heart of the improvement in confidence seems to be a reassessment of inflation developments and the risk of higher unemployment ahead, both of which are clearly down from April. Consistently, durable goods purchasing intentions also improved, while remaining at low levels. Consumers are certainly feeling the brunt of the acceleration in inflation but seem to consider it a temporary phenomenon, likely supported by a very resilient labour market.

On the business front, the picture looks gloomier for services and construction and stable among manufacturers and retailers.

The fifth consecutive decline in services confidence is driven by a sharp fall in tourism and transport and storage. In contrast, communication and business services posted modest gains. Such a pattern is not surprising, given the direct exposure of tourism to the increase in transportation costs tied to the deadlock in Middle East negotiations. The negative mood in the tourism sector might also be amplified by the fresh memories of very positive results seen in February for the Milano-Cortina winter games, now fully visible in a clear improvement in Bank of Italy balance of payments data. From a pricing intentions perspective, after accelerating in April, the relevant indicator fell back in May to levels prevailing in the first quarter, before the outbreak of the Middle East war - very tentative evidence of easing risks of imminent second-round effects.

The contained decline in construction confidence reflects stable confidence in the infrastructure segment, which remains at high levels, a slight improvement in the residential sector, and a decline in specialised works. The boost to infrastructure investment driven by the implementation of the national recovery plan, now close to its official deadline, has likely reached its peak, while the residential sector is still recovering from the after-effects of the “superbonus” tax incentive.

On the manufacturing front, confidence is stabilising at a slightly lower level than in the first quarter. Orders have been hovering within a narrow band since the beginning of the year while stocks of finished goods are gradually inching up over the second quarter, capping production expectations. The much-awaited cyclical recovery in manufacturing is being further delayed by current geopolitical circumstances.

Interestingly, in May, manufacturers’ pricing intentions remained at the April peak, last seen in late 2022. This suggests that manufacturers may have a different view on the persistence of price pressures following the Middle East stalemate than their counterparts in the services sector. As a result, the risk that at least some second-round effects will emerge in core inflation down the road cannot be dismissed.

Overall, today’s confidence data continues to point to some cooling in economic activity in the second quarter of 2026. The good news is that consumer confidence is not deteriorating sharply, limiting the risks for private consumption. After posting a 0.2% quarterly gain in the first quarter, we reiterate our call for flat GDP growth in the second.