Bank Austria Analysis – Industry Overview:
Sustained recovery put on hold for now – Industrial output to increase by under two percent in 2015
- Industrial output saw only slight growth of 1 percent in 2014
- Growth in output to be around two percent in 2015, driven mainly by vehicle manufacturing and the electrical industry
- Building activity is weak, with building construction not yet gathering pace and the momentum from civil engineering disappearing – stabilisation and growth in the latter not expected until later this year
- Stagnating consumer demand and poor investment and industrial trends are curbing retail activity
- Little momentum in service industries – the hospitality industry remained the main driver of growth in 2014
Despite a slight brightening in the economic climate at the turn of the year, Austria’s economy remains rooted to the spot for now. "The latest economic surveys confirm that we won’t now see an economic recovery until the second half of 2015 at least", summarised Bank Austria chief economist Stefan Bruckbauer. "As far as the industrial heavyweights are concerned, the main impetus for growth is coming from vehicle manufacturing and the electrical industry."
Industry upturn now not expected before 2016
In 2014, Austria’s industry remained well below the growth seen over the last twenty years for the third year in succession, with output up by a mere 1 percent compared to the average of 3.5 percent per year. Although the sector is likely to pick up speed in 2015, it will ultimately be unable to haul results back up to their long-term levels since the industrial economy is still suffering from a lack of export orders from abroad and low investment demand at home. In February 2015, the growing mood of pessimism amongst companies mirrored the Bank Austria Business Indicator, with both signalling that any recovery in the sector would not now set in until the second half of the year at the earliest. Provided that the growth forecasts for Austrian industry’s major markets hold true, the sector’s output in 2015 should be up some 1.7 percent year on year.
Vehicle manufacturing and the electrical industry are once again providing greater momentum for growth in the region of 4 percent, with these industrial heavyweights contributing 22 percent of total value added in the sector. Bank Austria economist Günter Wolf is expecting that “2015 will see domestic vehicle production share its leading position at the forefront of Austrian industry with the electrical industry, even though production forecasts grew gloomier in both industries at the start of the year, proportionally speaking.”
Furthermore, Austria’s machine building companies will be able to surpass the industry average for growth once again in 2015. However, the sector is still lacking any stronger impetus from the capital goods markets. "As the fall in machine building orders seen over the last few months suggests, we are not yet seeing any greater willingness to invest either in Austria or in other major European markets despite favourable framework conditions, low interest rates and raw materials prices and an advantageous exchange rate", Wolf explained. "Companies’ production forecasts for the first months of 2015 are correspondingly cautious. Assuming that business confidence increases further across Europe, however, investment plans which have spent years on the back burner will be at least partially implemented in the second half of 2015 at the latest."
Although the food and beverage industry, another key sector, enjoyed above-average production growth of 1.6 percent in 2014, it is unlikely to be able to repeat the result due to the weak economy, primarily in Austria itself. Fundamentally, however, this industry, which still managed to increase its workforce by 1.3 percent in 2014, remains an important and above all stable industrial employer in Austria.
Building industry loses considerable momentum in 2014
The building industry has lost considerable momentum as 2014 went on. Although sales were up by 1.4 percent in nominal terms, underpinned by civil engineering, sales in the sector fell slightly when adjusted for inflation. The short-term prospects for the construction industry have not improved either. As 2015 got under way, new orders in the sector were falling and jobs were being cut. If the gloomy forecasts from companies in January and February 2015 are anything to go by, the next few months should see output figures continue to fall.
Building construction finished 2014 with a nominal decline in sales of 1 percent. Falls were mainly recorded in industrial construction, partly in housing construction and, towards the end of the year, also in commercial building. As things stand, the prospects for 2015 are certainly more favourable for housing construction than for non-residential construction. This is indicated by the increase in building permits granted in the second half of the previous year, the announcement of further public investment in housing construction and the attractive financing terms available. By contrast, the construction industry can expect little if any stimulus from the corporate sector in 2015.
The main contributor to building activity in 2014 was civil engineering, with a nominal increase in sales of approximately 9 percent. Towards the end of 2014, a sharp drop in construction orders in the sector signalled that civil engineering activity was about to cool off, which it did at the start of 2015. Forecasts from the companies have also become gradually bleaker over the last few months, indicating that any stabilisation and further growth in civil engineering are unlikely until later in the year. The scale of the recovery will depend not least on the extent to which possible knock-on effects from the implementation of investment plans at EU level will benefit the financing of infrastructure projects at national level.
Stagnating consumer demand curbs retail
In 2014, stagnating consumer demand curbed the retail trade and, to an even greater extent, the vehicle trade, which – along with parts of the wholesale sector – suffered from the poor investment and industry trends. Retail spending only stabilised towards the end of the year, thus enabling a small increase in sales of 1.1 percent in nominal terms (0.4 percent in real terms). The retail trade is unlikely to see stronger growth in 2015 either, since consumer demand is only expected to recover slightly, keeping any growth in consumer spending under 1 percent in real terms. The coming year will see persistently strained employment data and a modest rise in income. We will have to wait until 2016 before the tax reforms at least begin to boost Austrians’ purchasing power and consumer sentiment.
The vehicle trade reported a nominal decrease in sales of 2.3 percent in 2014, which thus became its third negative financial year in a row. With the exception of the motorcycle trade, all sectors ended the year in negative figures. The first results from 2015 suggest a major fall in new vehicle registrations in January and February against the background of high numbers of advance purchases in the same period of the previous year, while the sales situation in the vehicle trade has deteriorated further.
The wholesale sector is dependent on the industrial and export trends, with the latter seeing no upturn in 2014; this dependence resulted in a nominal decrease in sales of 2.4 percent. The fuel and wholesale machinery trades reported above-average falls, whilst the majority of sectors trading in consumer goods and consumables increased their sales.
Service industries lacking momentum
In the previous year, many service industries were unable to escape the economic slowdown, above all the capacity utilisation problems facing industry and a weak export market. Sales in the sector rose by a mere 1.2 percent in nominal terms, remaining well below the long-term average of over 2 percent. "Business services such as transport, advertising and employment agencies, as well as telecommunications and publishing, suffered relatively high falls in sales", said Wolf, analysing the situation. "At the end of 2014, the service sector picked up speed for a time, but then rapidly lost momentum again, as demonstrated by the cautious business forecasts in January and February 2015. As 2015 goes on, most business services will not see any major recovery due to uncertainties affecting investment and export demand."
Transport saw a steady fall in sales in 2014 across all sectors except land transport. This was the case for other transport service providers, such as warehousing or freight forwarding services as well as for courier services and aviation. Although land transport, the most important sector of the industry in terms of its share of the market, profited from the lively construction industry in the first half of the year, it faced falling sales in the last quarter like the construction industry. By the start of 2015, the transport industry still had not mounted much of a recovery, as reflected in the dwindling business confidence of recent months. However, survey results from January and February signalled the first signs of a recovery in demand for transport and for courier services for the second quarter at least.
In 2014, as in the previous three years, the hospitality industry remained the main contributor to growth in the service sector. After cooling off for a brief period around the turn of the year, the sector will be able to regain its leading position in coming months according to the predominantly optimistic business forecasts from February 2015. Assuming that the recovery in the European economy gathers pace, the industry will also be able to maintain its growth over the rest of the year.
Enquiries: Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel. +43 (0) 50505 - 41954