Italy's Service Sector Contracts for First Time in 16 Months Amid Rising Costs and Weakening Demand

Italy's services industry slipped into contraction territory in March 2026 for the first time in over a year, as escalating costs tied to Middle East tensions and softening demand weighed heavily on business activity. The latest S&P Global Markets Services PMI Business Activity Index fell sharply to 48.8, down from 52.3 in February — dipping below the critical 50.0 mark that distinguishes growth from decline for the first time since November 2024.

New business orders deteriorated significantly, with the new business subindex sliding to 48.3 from 52.7 the previous month. Export demand followed a similar downward trend, dropping to 48.3 from 50.4, signaling that both domestic and international clients pulled back on spending. These declines point to a broader erosion of confidence in the Italian services economy as global uncertainties mount.

A key driver behind the downturn is surging input costs. Prices for raw materials, energy, and fuel pushed the input cost indicator to 64.6 — its highest reading in more than three years. S&P Global Markets economist Eleanor Dennison noted that challenging external conditions stemming from the ongoing Middle East conflict are directly impacting Italian service providers, calling the sector's performance "the strongest pace of contraction in nearly two-and-a-half years."

The weakness isn't isolated to services. Italy's manufacturing sector also reported accelerating input cost inflation in March, reaching a three-and-a-half-year high. The combined composite PMI — which tracks both sectors — dropped to 49.2 from 52.2, marking the first contraction in overall economic activity since January 2025.

Against this backdrop, the Italian government is now expected to revise its 2026 GDP growth forecast downward to approximately 0.5%, compared to the 0.7% estimate issued last autumn. Analysts warn that without stabilization in global commodity markets and geopolitical conditions, recovery in the Italian economy could remain elusive in the near term.