Sectoral Report of Bank Austria Economics Department:
Recovery remains subdued for the time being after a mixed 2013
- Industry ends 2013 with a small increase in production of 0.6 percent and stagnating sales
- Economic recovery in 2014 begins cautiously with the first growth impulses from the steel industry, machine building and the automotive industry
- Building activity under pressure
- Retail still recording negative growth – in 2014 the upswing in industry and improved µconsumer sentiment should stimulate retail sales
- Business service sectors only recovering slowly
- Consumer sentiment in Austria has been improving for months and during the course of the year slightly higher real incomes will provide additional stimulus
After a difficult year in 2013 there are signs of recovery in many, although not all, sectors of the Austrian economy. "At the beginning of 2014 we are seeing clear positive signs in the steel in-dustry and vehicle manufacturing, machine building but also the food and drinks industry, tour-ism and the IT branch, while the situation in the construction industry and telecoms remains tight. The retail sector has stabilised," said Bank Austria chief economist Stefan Bruckbauer, summing up the outlook for Austria’s industries.
Slight upturn in industry
Austrian industry recorded only a small increase in output of 0.6 percent in 2013 which was accompanied by stagnating turnover. Moreover, although business sentiment in early 2014 was positive on the whole, it was still not very convincing. As a current Bank Austria analysis shows, the upturn in the industrial sector is beginning cautiously and at the moment is getting little support from other sectors. Nevertheless in the current year, industry will overcome the weak growth of the last two years and increase production by at least 4 percent. The available indicators, the latest business surveys such as the Bank Austria Purchasing Managers Index and the employment trend are all pointing in this direction.
In industry stronger impulses are already coming from the steel, machine building and automotive industries – three heavyweights that create 28 percent of the value in the sector. Although the steel industry closed 2013 with an increase in output of 1.3 percent, a figure that is below the long-term average, the situation improved during the year and since September the industry has seen renewed growth, driven primarily by demand from European vehicle manufacturers who have increased production since autumn. Bank Austria economist Günter Wolf believes "the domestic steel industry can definitely improve on its weak result from the previous year, at the very latest when demand for steel gains broad momentum in Europe parallel to growth in the capital goods industry, as business surveys have been predicting for months." Optimism about the economic outlook on the part of input material and capital goods manufacturers in Austria has also been growing since autumn. What is missing is stronger demand from the construction industry.
Domestic machine building increased employment levels by more than 3 percent in 2013
In 2013 Austrian machine building companies were badly affected by weak investment in the most important markets and production output declined by 0.9 percent. However, as was the case in the steel industry this contraction was reversed in the fourth quarter. Against the background of growing optimism about the economic outlook among capital goods manufacturers at the beginning of 2014, further increases in the production of machinery can be expected as soon as international demand for capital goods broadens. Moreover, machine builders also increased their employment levels in 2013. As Wolf said, "The fact that machine builders raised their employment capacities by more than 3 percent in 2013, is not only a remarkable result in comparison with the industry as a whole with its stagnating employment levels, it also underlines the continuing optimism and the sector's strong competitiveness".
The domestic vehicle manufacturing industry also demonstrated its competitiveness and the outstanding position it holds in an industry comparison. Overall production rose by 5.7 percent and sales revenue by almost 8 percent. The industry's success, which is to a large extent based on a high level of integration with the successful German premium manufacturers, is likely to continue in 2014. The level of incoming orders lost almost none of its momentum in the second half of 2013 and the order backlog of the vehicle manufacturing industry was as high at the end of 2013 as it had been before the crisis.
Another key industry, the food and beverage industry, ended 2013 with production up by almost 2 percent which was better than expected. In the current year the industry should see a slight increase in growth: on the one hand, an increase in the level of employment averaging 1 percent compared to the previous year underlines the positive economic signals. On the other hand, at the beginning of 2014 companies were much more positive on their orders, in particular export orders, than in previous months, and again were increasingly optimistic about the development of business in six months’ time. In an industry comparison food production will again become less important as the economy picks up in 2014, as for structural reasons the industry cannot achieve the high growth rates of the capital goods manufacturers.
Building activity under pressure
Following an excellent year for construction in 2012 the order situation in the construction industry deteriorated significantly in 2013 and adjusted for inflation construction output for the year as a whole decreased slightly. The last driver of the construction industry was structural engineering, and above all, the construction of new housing. This higher level of housing construction was responsible for a 1 percent increase in employment in the structural engineering as a whole. At the same time, production in the building renovation and commercial building sectors slackened during 2013 significantly depressing the overall result. Production growth in structural engineering remained below 1 percent in 2013.
Although output from civil engineering activities gained momentum in the second half of 2013, the sector still fell short of the result in 2012 by more than 2 percent. The decline in output was especially pronounced in underground line construction and tunnel building. Furthermore the number of jobs in civil engineering fell by 4 percent and by 0.4 percent in the construction industry as a whole.
"Toward the end of 2013 a slight increase in the volume of construction orders and a decline in the number of pessimistic building companies signalled a hesitant improvement in building activity. But overall confidence in the building industry in January and February 2014 remained distinctly low and expectations that the construction sector would gain greater momentum as the year progresses, were dampened", said Wolf. "The situation in the industry is still characterised by reduced investments in construction and building projects that have been postponed."
Declining sales in the retail sector – 2014 stimulus for retail sales expected
The 2013 retail year was negative, just like 2012. The wholesale sector and some sections of the automobile business suffered under poor business growth, and the retail trade under restrained consumer spending. The sector (which accounts for 13 percent of Austria's economic output) ended 2013 with a deficit of 2.1 percent in real terms. In 2014 the recovery in industrial activity and improved customer sentiment should provide stimulus for retail sales.
New car purchases, as one of the most important items of discretionary spending in private households, were postponed in 2013 due to uncertainty about income growth. A 5 percent drop in new vehicle registrations resulted in substantial decline in turnover for the vehicle trade for the second year in succession. Even though this was offset by the vehicle repair sector, revenues in the industry have fallen by almost 1 percent in real terms. As the average number of new car registrations has grown in recent months, at least a moderate upturn in demand for cars can be expected.
Due to its dependence on industry and exports, the wholesale sector is particularly badly affected by weak industrial performance. Turnover in the sector declined steadily during 2013 by an annual average of 3.3 percent, adjusted for inflation. However, owing to the strong correlation with industrial activity, the sector will certainly grow again when the economy picks up again in 2014.
Retail spending rose in 2013 and turnover in the sector increased by an annual average of 1.4 percent in nominal terms. Adjusted for inflation there was a slight decline which should at least be compensated for in 2014. Consumer sentiment in Austria has improved in recent months and marginally stronger growth in real incomes will provide further stimulus.
Service industries report only a slow recovery
Activity in the service sector gained some slight momentum in the second half of 2013, driven by business services, the transport sector and gastronomy. The sector ended 2013 with a 1.5 percent increase in turnover in nominal terms. Bank Austria economist Günter Wolf emphasised that "business confidence and rising employment figures in the most important areas of the service sector in recent months point to a strengthening of the recovery in 2014, even if the services sector still lacks momentum in a long-term comparison."
Other business services such as security firms and cleaning companies were some of the fastest growing lines of business in 2013 with nominal sales growth of more than 4 percent and almost 7 percent respectively. In contrast, employment agencies reported a slight decline in turnover on an annual average. In addition, the branch has shed 4.5 percent of its employees, pointing to cautious capacity planning and difficulties in utilising capacity, particularly in industry which is one of its most important customers. The fact that the decline in employment slowed as the year progressed indicates that the level of industrial activity is stabilising. The 3 percent nominal growth in turnover generated by land transport in 2013 can be explained by the gradual recovery in industry. At the same time, other transport service providers, freight forwarding firms, parcel services and the aviation sector each saw their turnover decline by around 1 percent. Business expectations in early 2014 at least signal a recovery in the sector.
Activity in the IT services sector only slowed down slightly in 2013 and picked up again in early 2014, as measured by the more confident business expectations. In contrast, the outlook among telecommunications providers remained negative while competition and price pressure remained strong. In 2013 the sector reported a decline in turnover of 2.8 percent in nominal terms for the sixth year in succession.
Another driver in the services sector in 2013 was the hotel and catering industry which reported turnover growth of 3.5 percent in nominal terms. Taking into account lively tourism demand in the current winter season and the expected economic recovery in Europe the result should improve still further in 2014.
Enquiries: Bank Austria Economics & Market Analysis Austria
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