Would Italian neutrality in 1940 hurt the Allies?

Would the Allies be worse off if Italy stopped short of entering the war in 1940?

No; Britain would still watch Italy, but continued Mediterranean shipping would greatly shorten supply journeys and help build reserves.

The Royal Navy would still have to watch the Regia Marina if Italy stayed out of the war after France fell. Neutrality would nevertheless keep the Mediterranean route open for at least some additional time. That would shorten voyages and accelerate movement of personnel, rubber, minerals, and other Far Eastern supplies. The logistical benefit to Britain would probably exceed the burden of maintaining surveillance on Italy.