Economic upturn in Austria’s industrial sector continues at a high rate after getting off to a flying start in 2017. “At the beginning of spring, the domestic industry will be able to keep up the high expansion rates it has experienced over the previous months. Bank Austria's Purchasing Managers’ Index indicated a slight decrease in momentum in March in comparison to the previous months, but the index remains high on the whole. Currently at 56.8 points, the indicator is in fact reaching its third-highest levels for the past six years. The industrial sector in Austria is also on a very dynamic course of growth”, says UniCredit Bank Austria’s Chief Economist Stefan Bruckbauer. The monthly survey of Austria’s purchasing managers indicates a very positive economic outlook for the industrial sector in March in all partial results. “Despite slightly slow momentum, production expansion continues to be strong and the increase in the number of new orders and backlogs of work is significant. In addition, a marked acceleration in the increase in employment levels, as well as stock and price trends characterised by high demand during the month of March, indicate a continuing upwards trend in domestic industry”, Bruckbauer explains.
In March, the momentum in new business continued to slow down slightly, as in the previous months, though this slowdown is based on a six-year high. The backlogs of work are therefore increasing at a slightly slower rate, but the upward trend continues. “Domestic companies were able to draw in more orders from both Austria and abroad in March. However, growth in new business is declining in comparison to previous months. The industrial sector has responded with a decrease in production expansion at the end of the first quarter of 2017”, says Walter Pudschedl, Economist at UniCredit Bank Austria, referring to the most important factor for the slight drop in the Bank Austria Purchasing Managers’ Index during the month of March. The subindex for production output has fallen from 59.1 points in February to 57.4 points. Irrespective of the first two months of this year, March saw the index reach its highest figures since spring 2011.
Industry a driving force for job creation
Industry in Austria has now been on a growth trajectory for two years. Employment levels have followed suit, albeit at a slightly slower rate. 2016 saw a slight increase in employment levels of 0.3 percent for the first time in two years. “Driven by substantial production expansion, the start of 2017 saw a noticeable increase in the number of jobs in the industrial sector. The subindex of Bank Austria’s Purchasing Managers’ Index indicates more significant acceleration in employment growth, which rose to 57.4 points in March”, Pudschedl explains. In the first quarter of 2017, unemployment rates in the industrial sector (Nace08: Manufacture of goods) dropped to an average of 5.3 percent. As a result, unemployment levels in the sector are falling at a significantly slower rate in comparison with the economy as a whole (January to March: 9.9 percent). Given that the economic outlook for 2017 continues to be positive, a clear increase in employment levels within the industrial sector at around 2 percent is expected. This means the creation of around 10,000 more jobs than in 2016, with unemployment rates in the sector falling below the 5 percent mark on average for 2017. Unemployment rates of 9.1 percent are expected for the economy as a whole.
Market power of companies on the rise
Global economic recovery was reflected in March once again by the increase in commodity prices. Input prices for domestic industry saw a sharper increase in March than in the previous months. Output prices also increased at a higher rate than in the previous month, but the additional cost burden caused by higher energy and primary material prices could not be completely offset.
“As a result of input prices increasing at a higher rate than output prices, the cost situation within Austrian companies has been deteriorating on the whole for almost a year. However, the high levels of demand the country is currently experiencing is increasing companies' market power, which could lead to a trend reversal in this regard”, says Pudschedl. However, economists at UniCredit Bank Austria are not expecting a price/wage spiral, which would drive inflation rates in Austria to well over 2 percent in 2017/18.
Despite the sharp increase in input prices, industrial companies have been stocking up heavily on materials due to the continual upturn in the industrial sector, which has become increasingly stronger and more robust since the beginning of the year. “We are confident that this upturn will continue into the coming months, since the solid increase in internal demand has also been supported by strong demand from overseas over the last few months. The further increase in the Purchasing Managers’ Index for the Eurozone to 56.2 points, the highest since April 2011, is an important indicator for this”, Bruckbauer explains.
Positive economic development in Germany has made a significant contribution to the improvement in industrial activity throughout Europe. The Purchasing Managers’ Index for Austria’s most important trade partners has even risen to 58.3 points, and the IFO Business Climate Index is currently rising significantly. Following a period of slow momentum in the previous year, global trade is now showing signs of a revival. Austria’s export-oriented industry is set to benefit from this.
In this positive environment, production expectations of domestic purchasing managers are distinctly high. The futures index, calculated as part of the Purchasing Managers’ Index survey, holds out the prospect of noticeable expansion in the industrial sector over the coming twelve months, with a substantial 63.7 points in March. “We are expecting production growth of around 3 percent in the domestic industry for 2017. In particular, the export-oriented sectors of the steel industry, the electrical industry and parts of the motor vehicle production industry will provide more momentum than in the previous year. The food production industry also has more growth potential for 2017”, Bruckbauer concludes.
Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 50505 - 41957