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27.07.2018

UniCredit Bank Austria Purchasing Managers’ Index in July:
Industry growth stabilises in Austria; however, risks still remain from global politics

  • UniCredit Bank Austria Purchasing Managers’ Index rose again slightly to 56.8 points in July for the first time in six months
  • Productionoutput increases picking up for the second month in a row; job growth accelerating
  • Increased cost burden for domestic industrial operations due to sharp increase in input prices
  • New business increases retreat: Global trade uncertainty halts two-year expansion in new export orders
  • Austrian industry expecting further substantial medium-term increases, but optimism noticeably lower than at start of 2018

Following a particularly dynamic expansion phase around the end of 2017 and start of 2018, industrial activity has consistently lost momentum over the past few months. The cyclically conditioned slowdown has intensified due to increasing uncertainty in global trade. However, in the meantime, clear signals of stabilisation are appearing, despite an increasing intensification of protectionist trends. “The UniCredit Bank Austria Purchasing Managers’ Index hit 56.8 points in July. The slowdown in industrial activity over the past six months is over. Sustained high growth has stabilised over the summer,” said Stefan Bruckbauer, UniCredit Bank Austria's Chief Economist. While the extremely high growth rate of the first few months of 2018 has not been achieved, the industrial sector is still the most dynamic element in the Austrian economy, with growth rates currently greater than 5 per cent year-on-year.

Stabilisation of domestic industrial activity at a high level is in line with the trend throughout Europe. The preliminary purchasing managers’ index for the processing industry in the eurozone increased slightly, after a retreat over the past several months. Strong tail winds from the core nations like Germany and France made a decisive contribution. However, at 55.1 points, the purchasing managers’ index for the eurozone is clearly below the Austrian figure. Industrial activity in Austria has been running substantially stronger compared to the European average for the past two and a half years.

“The slight increase in the UniCredit Bank Austria Purchasing Managers’ Index in July must be credited to greater expansion in production capacity and especially accelerated employment growth compared to the previous month. While the hesitant but optimistic attitude of companies is reflected in their inventory management, the order situation is bleaker,” said Bruckbauer, summarising some detailed results from the monthly survey of Austrian purchasing managers.

Stagnation in new export orders
The development in the order situation noticeably hampered the increase in the UniCredit Bank Austria Purchasing Managers’ Index in July. The sub-index for order development has been dropping for seven months, and at a current level of 52.1 points is at its lowest in almost two years. “Growth in new orders dropped again in July. This is due solely to demand from abroad, which was stagnant for the first time in two years. On the other hand, domestic orders have increased strongly. Domestic operations even managed to slightly expand production in July, despite the overall drop in order growth,” said Walter Pudschedl, Economist for UniCredit Bank Austria. At 56.2 points, the production index rose by 0.2 points over the previous month, indicating growth in production over the long term.

Employment increases picking up again in July
Growth in jobs further accelerated in the domestic industry in the wake of stronger production performance. Employment in manufacturing has grown steadily over the past two years, with even more accelerated growth since the autumn of 2017. “The employment situation in Austria grew by a remarkable 3.5 percent in the first half of 2018 compared to the previous year, by more than 20,000 workers to over 610,000. Industry has accounted for about one fourth of the increase in employment in Austria during this period. The rate of unemployment has clearly dropped under the level of 4 per cent, and is only half as high as the economy overall,” said Pudschedl. The economists at UniCredit Bank Austria expect the total unemployment rate for 2018 to drop to 7.7 per cent in the economy overall, and to 3.8 per cent in manufacturing. That would bring the unemployment rate in manufacturing close to the pre-crisis level for the first time, while the unemployment rate for the overall economy from 2008 of 5.9 per cent will remain out of reach.

Increasing cost burdens
Despite sluggish movement in orders, domestic companies significantly increased their quantity of purchases of raw and input materials in July. This was reflected in extended supplier´ delivery times due to lower stocks, and also resulted in considerable upward pressure on prices. Furthermore, Austrian industrial facilities were again saddled with increasing global price movement in July. “Many raw materials had to be purchased at significantly higher prices in July than in June. However, demand was not strong enough to raise output prices at least as much. The bottom line was a slight strain on the cost and earnings situation for domestic companies compared to the previous month,” Pudschedl concluded.

Growth rate stabilised for the moment, but risks increasing
The current UniCredit Bank Austria Purchasing Managers’ Index indicates a stabilisation of the growth rate in Austrian industry, after a six-month cyclical slowdown. The current indicator has not only slightly risen for the first time in half a year, but at 56.8 points it is significantly in excess of the long-term average, clearly exceeding the growth limit of 50 points. The proportion of new orders to inventory also indicates sustained growth in the coming months as well. Stocks of finished goods are still too low to handle the rising numbers of new orders, so further production increases are to be expected. Domestic companies are also sanguine about the medium-term outlook. The future output index, which provides the production expectations for the coming twelve months, promises a healthy upswing in domestic industry, despite a setback of 58.2 points in the prior month. “Austrian industrial production grew by an average of about 6.5 percent in the first six months of 2018. With the current strong indicators of economic stabilisation behind us, we expect an increase of around 5 per cent for 2018 as a whole. This means that industrial growth will be even stronger than it was in the prior year,” Bruckbauer expects.

At first glance, the stabilisation obvious in the current UniCredit Bank Austria Purchasing Managers’ Index seems to indicate a strong economic trend beyond the summer as well. However, given the considerable political uncertainty and the danger of an expansion of trade conflicts, the current positive signals may not be so reliable. The extent to which the current trade negotiations between the USA and the EU may put a halt to the uncertainty still cannot be estimated at present. In any event, companies have taken a watchful approach for now. This was reflected in the stagnating export orders for July, among other things. The presently still optimistic prevailing sentiment may suddenly turn, and the current indicated industrial stabilisation may prove to be unsustainable. Although the growth outlook is expected to remain favourable for the time being, the downside risks for Austrian industry have increased.

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Enquiries: UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
E-mail: walter.pudschedl@unicreditgroup.at