UniCredit Bank Austria Purchasing Managers' Index in July:
The economy continues to weaken, falling demand leads to job cuts in Austrian industry
- In July, the UniCredit Bank Austria Purchasing Manager's Index fell to 47.0 points, placing it below the growth threshold of 50 points for the fourth month in a row
- However, the decline in production output is being slowed by the reduction in order backlogs.
- The losses in new business were lower in July than in previous months.
- Employment in Austrian industry declines for the first time in 40 months.
- Sharp declines in raw material costs and strong competition lead to the first reduction in output prices in almost three years, but with the support of declining input prices it was possible to maintain profit margins.
- The drop in purchasing volumes, the reduction in inventories and the renewed decline in production expectations point to rising economic concerns on the part of industrial companies.
The downturn in the Austrian industrial economy since its peak at the turn of 2016/17 resulted in a slight recession in spring 2019. Conditions were also unfavourable for domestic industry at the start of the third quarter. "The UniCredit Bank Austria Purchasing Manager’s Index fell again in July 2019 and, at just 47.0 points, is now below the growth threshold of 50 points for the fourth month in a row. The indicator thus points to the most unfavourable development in Austrian industry for almost five years," says UniCredit Bank Austria's chief economist Stefan Bruckbauer, adding: "The pace of the industrial downturn has not yet slowed. However, we expect it to bottom out in the next few months, even if there are few signs of this right now."
Production in decline for three months
New business in domestic industry has been declining since the beginning of this year, triggered by the slowdown in world trade, which has led to a sharp drop in new foreign orders. The current industrial economy in Austria continues to be characterised by weak demand for "Made in Austria". The rise in the corresponding index for new export orders to 46.5 points in July, the highest level seen this year, signals at least some consolidation in the export business. "As a result of the continuing downturn in new business, domestic industrial companies reduced their production output again in July. However, at 49.5 points, the production index was only slightly below the growth threshold because a very substantial number of backlogged orders were processed," says UniCredit Bank Austria economist Walter Pudschedl. Order backlogs have fallen more sharply than at any time in the last seven years, and delivery times in Austrian industry have fallen at the strongest rate since the financial crisis in 2009.
Reduction in employment has begun
With a delay of three months, the reduction in production output is now being followed by a reduction in employment. The employment index fell to 47.6 points in July, below the growth threshold for the first time since March 2016. Despite the weakening demand, employment in the first half of 2019 still rose by almost 13,000 persons or 2.1 per cent year-on-year to an average of almost 630,000 employees. "As a result of the excellent industrial economy in recent years, the unemployment rate in the manufacturing industry had fallen to an average of 3.7 percent by the first half of 2019, after standing at 3.8 percent in 2018. With the trend reversal that has now begun, we expect an unemployment rate of at best 3.7 percent for 2019 as a whole. However, this means that the situation on the labour market for this sector will continue to be much more favourable than in the overall economy, where the unemployment rate is 7.4 per cent on average in 2019," says Pudschedl.
Pronounced weakness in demand dampens price development
The decline in new business is also reflected in current price trends. The cost of raw and primary materials dropped more in July than at any time in the last three years. Due to fierce competition in a weak demand environment, domestic industrial companies even slightly reduced their output prices for the first time in 34 months in order to counter sales losses. "Supported by the sharp drop in input prices, domestic industrial companies managed to maintain profit margins in a weak demand environment despite the low pricing power in sales. On average, the earnings situation in July was even a general improvement over the previous month," says Pudschedl.
As a result of persistently weak demand, the domestic companies are again placing greater emphasis on cautious and cost-conscious inventory management. For the third month in a row, a significant reduction in purchasing volume led to a reduction in stocks of purchases. Stocks of finished goods, on the other hand, remained largely constant, underlined by corresponding adjustments made by companies to take account of the lower production requirements due to weak new business.
Declining production expectations
The UniCredit Bank Austria Purchasing Manager's Index has been below the growth threshold of 50 points for four consecutive months now. The slight recession in domestic industry that began in the spring continued at the beginning of the third quarter. "Austrian industry is currently in somewhat better shape than Germany's, at least. The preliminary purchasing manager's index for the eurozone is 46.4 points, similar to that for Austria, but in Germany it has fallen to just 43.1 points," says Bruckbauer. Austrian industry has managed to decouple itself somewhat from this particularly unfavourable development, as it is not affected to the same extent by industry-specific problems of German firms, including the overweighting of Eastern European markets.
Ongoing trade conflicts and political tensions continued to have a strong impact on global trade and thus on Austria's export economy. "The significant reduction in purchasing volumes, the reduction in raw material inventories and the first decline in employment in July are evidence of continuing uncertainty. The outlook for Austrian industry has also deteriorated over the course of the year," says Bruckbauer, adding in conclusion: "The index for production expectations in 12 months has fallen to 49.3 points, its lowest level since February 2015."
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 5 05 05-41957;