UniCredit Bank Austria AG Industry Overview
Climate in the service sector remains sunny, but frostier in industry
- Industry is losing momentum in 2019; production growth down by around 2.5 per cent
- Significant declines in growth expected in electrical and electronics industries, metal goods manufacturing and the automotive industry
- Construction activity remains buoyant
- Climate in the service sector remains sunny: Demand expectations in almost all major sectors have continued to improve
- Etailers have also gained business confidence in the spring
“The current business surveys at sector level from spring 2019 paint an inconsistent, but not unpleasant, economic picture. While industry has become more cautious in its production expectations for the second quarter, construction companies, service providers and retailers have, on balance, remained optimistic about their expectations. In conclusion, Austria’s economy for 2019 has already seen its growth rate slow, but companies have not lost confidence in business development going forward,” said Günter Wolf, economist at UniCredit Bank Austria, summarising the current sector overview. “Even in the industry sector, the climate – also in line with the expectations of the realised production performance in the first quarter of 2019 – remained sunny in individual sectors. These include the automotive, steel and chemical industries,” says Wolf.
Industry growth rate slows in 2019
In the first quarter of 2019, industrial production was still accelerating, with growth of around 5 per cent by March, still above the annual average of 3.8 per cent recorded in 2018. However, the increasingly cautious economic survey results for the last few months already indicate a significant slowdown in industrial activity for the second quarter. As a result, the sector climate has also cooled in April. Industrial companies were particularly pessimistic in their recent evaluation of the export order books. 2019 has seen Austrian industry impacted primarily by sales reductions in the major European export markets, in particular Germany, Italy and Switzerland. The markets are showing signs of a slowdown in investment activity, which is impacting equipment manufacturers more than consumer-oriented sectors. Industrial production is only expected to record further growth of around 2.5 per cent in 2019.
“Austria’s industry is not currently threatened by a significant drop in production. Even Austrian capital goods manufacturers need not fear a slump in their export demand, based on the assumption that trade turbulences will not increase. In April, EU industry almost fully confirmed its investment expansion planned for 2019 at the end of the previous year,” said Wolf. The continued optimism of the companies is expected to be based on the unchanged high capacity utilisation, which in the second quarter reached 82.5 per cent on average across the EU and 87 per cent in Austria, and is therefore only one percentage point below the record utilisation of the previous year.
In the first quarter, mechanical engineering and plastic goods manufacturers still recorded a production increase compared to the previous quarter; however, companies in both sectors have become more cautious in assessing the current business situation and production opportunities in the next few months. For manufacturers of metal goods and electrotechnical products, production in the first quarter was also down on the previous quarter. The deterioration in the sector’s climate reflects the slowdown in capital expenditure in Austria and abroad, as well as the cooling down of domestic demand for growth.
On the other hand, during April, the climate in the chemical, steel and vehicle production sectors remained sunny. The companies have given more positive assessments of both their current situation and their short-term business than in previous months. The survey results in the automotive industry are noteworthy; they show that the decline in production of the German car industry and the smouldering trade conflict with the USA have not yet very unsettled Austrian supply companies. However, in the second half of the year at the latest, the sector’s economy will continue to cool down, as Austria’s automotive industry cannot evade the weakness of the European automotive economy. To a lesser extent, the steel industry is also affected, and must also expect a slowdown in demand from the construction industry and other customer industries in Austria and abroad, such as electrical engineering.
Construction remains buoyant
Austria’s construction industry recorded a price-adjusted increase in sales of 8 per cent in 2018 – its best result for fifteen years. Growth was similarly high in civil engineering and construction. Against this backdrop, the construction industry is expected to cool down significantly in 2019, but is not expected to slip into negative territory. Further growth is indicated by both the latest economic analyses of construction companies, which assessed their order situation as optimistic as in the previous year, and by the continuation of good framework conditions, not least the favourable financing conditions for construction projects. In any case, an increase in sales in the range of 3 real per cent is still possible in 2019.
In 2018, growth in the construction sector was largely driven by ancillary construction trades and increasingly by new orders in commercial construction, while residential construction lost some momentum. In the last few months, business confidence values at the division level show that in 2019, the order focus in construction is shifting further from construction towards adaptation work. The very large decrease of around 20 per cent in civil engineering orders from the first quarter is not only due to the slowdown in the sector’s business activity, but is also the result of the general volatility of the development of orders in the sector. In April, the companies continued to assess their order situation as better than in the long-term. In addition, in the second quarter of 2019, civil engineering companies report that they are at full capacity for the next eleven months, with this figure at its highest level since the survey started in 1996.
“From January to April 2019, the number of jobs in the Austrian construction industry increased by more than 6 per cent, with growth recorded both in building construction, which is labour intensive, and in civil engineering. This excellent employment growth is a reflection of continued positive construction growth,” says industry analyst Wolf.
Services remain the top performers in terms of growth
In 2018, sales from business services rose by 5.7 per cent in nominal terms, which was greater than in the preceding fifteen years. For many years, the sector has been one of the fastest-growing in the Austrian economy, and it is expected to retain this position in 2019. At the very least, the climate in the service sector remained sunny for the first four months. In April, the demand expectations of almost all major sectors improved again: warehousing, IT and other technical services, advertising and, again, the expectations of companies in the hotel and hospitality sector. The survey results support the conclusion that the tourism economy seems to have stabilised again after the setback in the first quarter. In any case, the hotel and hospitality industry will fall significantly short of the above-average increase in sales of 7.5 per cent recorded in the previous year.
In April 2019, only assessments of land transport contractors, consultancy services and personnel placement have, on balance, become more cautious; in conclusion, this is an indication of the slowdown of industrial activity. “The weak increase in package service sales of 0.2 per cent in nominal terms for 2018 is noteworthy. While companies do benefit from thriving online trade, they are subjected to strong competition and price pressure. As part of the April 2019 economic survey, package services were once again optimistic about the development of demand over the next few months, but remained pessimistic regarding price expectations,” said Wolf.
Increased optimism among retailers
In 2019, Austria’s car dealers are not able to improve upon their weak price-adjusted increase in sales of 0.7 per cent recorded in 2018. Vehicle sales, which, by April 2019, had fallen by 5 per cent, will be able to stabilise over the remainder of the financial year, though they will barely increase. In April, the dealers became at least slightly more confident in the sales outlook for the next few months.
In 2018, wholesale turnover increased significantly at 2.1 per cent above average in real terms. In 2019, the sector will most likely fall short of the forecast because the main growth drivers, the industrial and export economies, are losing a lot of momentum in comparison with the previous year, which, in turn, cannot be compensated for by construction and the retail industry.
Despite very good framework conditions, retail sales grew by just 0.2 per cent in real terms in 2018. What’s more, income development is expected to remain a pillar of private consumer demand in 2019, though it will once more only benefit minimally from retail and will primarily be used for services or online purchases. The optimistic sales expectations of retailers for the second quarter of 2019, particularly in industries which are not involved in the trading of foodstuffs, are expected to allow for at least a short-term acceleration of the sector’s business activity and, last but not least, improve the sector’s climate.
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954