Bank Austria Analysis – Industry Overview:
Economic activity slows in early autumn – industry output set to grow by no more than 2 percent throughout entire year
- Industrial production still rose by 2.6 percent until July, but has been losing momentum for months
- Average production growth of 2 percent for industry still achievable in 2014 – main drivers are vehicle manufacturing and electronics industry
- Cracks increasingly appearing in construction activity
- Trade still negative, blighted by adverse results from vehicle sales and wholesaling; retail trade will barely grow either in real terms
- Service sectors losing economic traction, but downturn unlikely
After a tricky 2013, Austria’s economy briefly recovered across the board in early 2014. Yet the expansion seen in most sectors vanished again by the middle of the year. "The latest economic surveys in autumn 2014 confirmed the trend observed based on data from July and August: Only vehicle manufacturing and the electronics industry are providing any notable growth stimulus from all the industrial heavyweights; the food and beverage industry is growing stably, but at a low level, while the economic assessments of metalware manufacturers and mechanical engineering companies have become more pessimistic. The construction industry can rely on expansion in civil engineering, but production in structural engineering has already contracted. Finally, pessimism has dominated commerce, tourism and most business-related service segments since the start of autumn – with the exception of the IT industry", said Stefan Bruckbauer, chief economist at Bank Austria, summarising the latest industry overview.
Only moderate industrial upturn expected
Austrian industry will recover from its negative production figure in 2013 to grow by 0.6 percent in 2014. Until July, output was still expanding by an average of 2.6 percent. Nonetheless, the dynamic upswing in industrial activity at the start of the year cooled down again in the second quarter, and has failed to recover ever since. Although further setbacks are anticipated until the end of 2014 there should be no severe contraction of activity, as demonstrated by the results of the business surveys and the trend in Bank Austria’s Business Indicator. Thus in 2014 as a whole, industrial output will at best increase by 2 percent.
Vehicle manufacturing and the electronics industry are still providing strong impetus: these two industry heavyweights contribute 22 percent to the sector’s added value. Bank Austria economist Günter Wolf does not expect "domestic vehicle manufacturing to relinquish its position as growth leader for Austrian industry in 2014. The share of optimistic production expectations was also still exceptionally high in September." Recording production growth of an average 8 percent until July, the sector is again demonstrating its competitiveness and special position by industry comparison this year. Optimism about economic trends increased in the electronics industry too in September. Ongoing export success with electronics technologies from Austria and presumably also higher investment in domestic infrastructure will likely be crucial here.
Austria’s mechanical engineers should maintain their slight competitive advantage over the industry average until the end of 2014. That said, the sector is increasingly lacking orders from capital goods markets. Wolf: "The weak investment demand, which is no longer expected to recover in 2014 on account of the economic uncertainty, is a significant burden for Austrian mechanical engineering firms. The majority of the companies nevertheless remained optimistic about production expectations in September, which in turn leads us to conclude that the sector will not suffer any sustained setback."
Another key industrial sector, food and beverages, generated average production growth of 2 percent until July 2014. Throughout the rest of the year we expect to see similarly stable development in the sector, as shown by the marginal increase in the companies’ optimism in September and the relatively high employment growth in the third quarter of 1.7 percent. This propelled the food and beverages sector forward to become a solid pillar for industry, even though, for structural reasons, it never achieved the high growth rates of capital goods manufacturers in dynamic industrial years.
Cracks appearing in construction
Following the dynamic start to the year in 2014, the construction industry quickly lost momentum in subsequent months, especially ancillary building trades in structural engineering. This sector is not only missing orders from commercial construction companies, but also and increasingly new residential building projects. Declining numbers of new planning permissions in the first six months as well as signs of cost-cutting with public-sector projects and construction subsidies signal a cool-down phase for residential building. Civil engineering increasingly proved to be a pillar of economic activity in 2014, particularly with high growth in road and tunnel construction.
Employment growth in structural engineering shuddered to a halt back in the first quarter of 2014. Jobs in the sector have been falling since the second quarter, by an average of 2 percent from January to July. The insufficient utilisation of capacities in the relatively labour-intensive structural engineering segments could no longer be compensated for by new hiring in civil engineering. "The results of the economic surveys in September reveal a flattening of the downwards trend in construction, but do not fuel hopes of any swift recovery", emphasised Wolf. "All told the sector will be able to make up for last year’s negative production figure of -0.8 percent, but it is not likely to grow more strongly than 2 percent in real terms".
Trade in negative territory – no recovery likely by end of 2014
2014 has been a bad year for trading, just like the previous year: after an encouraging first quarter, wholesaling and parts of the automobile business were hampered by the increasingly weak industrial performance, while retail sales figures came under pressure because of dwindling consumer confidence. Overall retail sales dropped by 1.3 percent in real terms until July 2014.
The weak economic sentiment among consumers and companies had a severe impact on vehicle trading since the new purchase of a car is always considered "discretionary spending" that is relatively easy to put off. Following the surge in revenues in the first quarter of 2014 as a result of purchases being brought forward in the run up to the March increase in car registration tax, sales and revenues in the car industry suffered a marked slump. This sector will likely record its third negative business year in a row in 2014.
In light of its ties to industry, wholesaling is suffering in 2014 from the weak foreign trade and industry performance; for two quarters it has recorded declines in revenue in both nominal and real terms. The ongoing slowdown in industrial activity in recent months means there is no longer any chance of a recovery in wholesaling either before the end of the year.
Retail activity remains subdued – nominal gains in revenue until July have already been lost again in real terms. Falling real wages and the still weak labour market data are curbing consumer spending among households. Even if retailers’ expectations of business activity in the coming months improved slightly in September, we do not predict any growth spurt and average annual revenue growth will remain under 1 percent in real terms.
Service sectors lose traction
The economic position of almost every services sector worsened during the first six months of 2014, with revenue growth stalling at less than 1 percent in nominal terms. The increasingly pessimistic sentiment of companies in recent months has showed that services activity continues to slow down, but we do not have to fear a more dynamic downturn in what remains of the year. "The services sector should stabilise in the fourth quarter of 2014. Companies’ business expectations for the coming months even brightened up somewhat in September in certain key areas, such as land transport and IT services. Furthermore, the constant growth in employment in the majority of services sectors throughout the first three quarters confirms the steady, positive business development. This sector will definitely end the year in the black overall", said Wolf, analysing the situation.
The sharpest declines in revenue were recorded by telecom providers in the first half of 2014. As a result of the high competition and price pressure, revenues in this segment contracted in nominal terms for the sixth year in a row. Additionally, personnel companies are reporting exceptionally high declines in revenue. Other economic services, which is proportionally the largest segment of all, has suffered this year particularly from the capacity difficulties experienced in industry, one of its main clients. Moreover, publishing revenues registered a sharp fall in the first six months of 2014 too. Ultimately there will be no economic recovery in any of the three segments this year; on the contrary, the ratio of more pessimistic voices in fact increased in September among personnel companies and publishers.
The sectors of accommodation and gastronomy proved to be key pillars of growth in the services sector during the first six months of 2014, as in previous years. However, the business expectations of accommodation firms fell sharply at the start of autumn and suggest tourism activity is set to slow down. Weather conditions mean that tourism demand probably already fell in September. The jobs lost at travel agencies in the third quarter fit in with this profile.
Enquiries: Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0) 50505 - 41954