Bank Austria Purchasing Managers' Index for April:
Industry still in holding pattern - start of recovery delayed

• Bank Austria's Purchasing Managers' Index at 47.8 points in April, once again below the growth threshold, modest downwards trend since January continues
• Lack of demand stimulus results in lower production and adjustments to headcounts in April
• Industrial companies cutting costs with inventories – sharp decline in input prices lends support
• Industry recovery not expected until second half of the year: production growth of just 1 percent expected in 2013

Due to lack of demand stimulus, industrial activity in Austria just cannot get going again. "In the meantime, Bank Austria's Purchasing Managers' Index has fallen just below the threshold between growth and contraction for the tenth month in a row. What is more, the indicator in April confirmed the modest downward trend that set in at the start of 2013, falling 0.3 to 47.8 points", said Bank Austria chief economist Stefan Bruckbauer. The result of the survey in Austria reflects the trend of the European equivalent: the Purchasing Managers' Index in April in the eurozone also declined by 0.3 points, but to a somewhat lower reading of 46.5 points, while in Germany, the main customer for Austrian industrial goods, the indicator sits at 47.9 points just now after a stronger fall. "The somewhat exaggerated pessimism seen with all the European sentiment indicators for April is probably connected to the tangible uncertainty surrounding the Cypriot crisis which was under debate when the survey was conducted; however, this changes nothing on the fact that Austrian industry is currently lacking orders, which is leading to more cuts in production and in April to a reduction in employment as well. The weak demand is also reflected in falling prices and high cost awareness with inventory management", said Bruckbauer, outlining the key points of the Austrian survey conducted with purchasing managers in the manufacturing sector.

Sentiment in Austrian industry has been subdued by the uncertainties in Europe caused by the difficulties in forming a government in Italy and especially the way the Cypriot crisis has been dealt with. The confidence to launch new projects is still not there. "Although there have been tentative signs in exports of an upturn in demand at the start of the second quarter, the order flow overall worsened again in April. Consequently, Austrian companies resolved to lower their production levels", summarised Bank Austria economist Walter Pudschedl. Production output in April shrank for the fifth month in a row. The production component is sitting at 48.8 points after totalling 46.9 in the previous month, which shows, however, that the pace of the decrease has fallen sharply.

The drop in production capacities was unable to compensate for the fall in orders. The order backlog fell more strongly in April than in the previous six months. Furthermore, business owners reacted to the lack of new business by scaling back their workforces. After a modest increase in jobs in the previous month, the adjustments necessary because of the sluggish orders in April led to job cuts in manufacturing.

The persistently weak demand made itself keenly felt in the latest price trends. Purchasing prices have now fallen for the third time in a row, and the decline this month was also the strongest since July of last year. The tough competition coupled with the restrained interest from customers brought about a fall in sales prices for the second month in a row – albeit only slightly. "Price trends have been bolstering the earnings positions of Austrian companies since the start of 2013 as the reduction in sales prices has not fully matched the noticeable cost cuts in purchasing. Additionally, purposeful attempts were made to reduce inventory levels with a view to exerting a positive influence on costs and earnings", said Pudschedl. That said, there was no change in finished goods' stocks in April as many companies registered an unwanted increase in inventories on account of the weak sales. By contrast, stocks of primary materials have been falling for a year now, and the decline even picked up pace in April, which was subsequently reflected in a significant reduction in purchase quantities. Given the scaled-back purchasing from industrial enterprises, average delivery times of suppliers have now fallen for the third month in a row.

The modest and renewed fall registered for Bank Austria's Purchasing Managers' Index in April coupled with the stagnation since the turn of the year and the lack of improvement in the European equivalent make it clear that the much hoped-for recovery in industry has yet to start. "Austrian industry is extremely competitive on an international scale and finds itself on very healthy foundations – but it is still in a holding position. However, we are optimistic that the recovery will get into gear later on in the second half of 2013, and Austrian industrial enterprises will still be able to achieve production growth in 2013 of an average 1 percent", explained Bruckbauer.

Cut in key interest expected
European Purchasing Managers’ indices disappointed once more in April, and when this is taken with the decline in the German IFO business climate index it becomes increasingly likely that the European Central Bank will indeed opt to lower the interest rate to boost economic activity. Bruckbauer added: "We assume that the European Central Bank will reduce its key rate by 25 basis points to 0.5 percent over the next two months, even though the potential for stimulating the real economy with conventional means is very limited given the already low interest rate".
As to exactly when the interest decision will be made, this depends heavily on the quality of the leading indicators in the coming weeks according to the economists at Bank Austria; the signs rather point towards June, as GDP data for the first quarter will be available by then.

 charts (PDF; 40 KB)

Enquiries: Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 50505 - 41957;
E-Mail: walter.pudschedl@unicreditgroup.at

Note: PMI figures above the 50.0 mark indicate growth compared to the previous month; readings below the 50.0 mark indicate contraction. The greater the divergence from 50.0, the greater the change signalled. This report contains the original data from the monthly survey of purchasing managers from industrial companies in Austria. The survey is sponsored by Bank Austria and has been carried out by Markit Economics under the auspices of ÖPWZ, the Austrian Productivity and Efficiency Centre, since October 1998.