UniCredit Bank Austria Purchasing Managers' Index in March
Corona crisis triggers slump in Austrian industry but good prospects for a strong rebound in the second half of the year
- The UniCredit Bank Austria Purchasing Managers' Index fell to 45.8 points in March, posting its strongest monthly decline since the financial crisis
- The massive slump in new orders triggered a significant reduction in production output
- In March, Austrian industrial businesses began to reduce the number of employees significantly
- The drop in input and output prices has accelerated
- The industrial economy is likely to follow a V-shaped course if the spread of the coronavirus can be contained by the summer
- Manufacturing in Austria is set to decrease by around 7 percent for 2020 as whole
Following positive indicators of stabilisation at the start of the year, Austrian industry is now being impacted considerably by the effects of the corona crisis. "The UniCredit Bank Austria Purchasing Managers' Index fell to 45.8 points in March. This 4.4-point month-on-month drop in the indicator was the biggest since the start of the financial crisis in autumn 2008, indicating a sharp deterioration of the recession that has affected Austrian industry since spring 2019", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.
This trend indicates that domestic industry is following the same course as the international industrial markets. The provisional Purchasing Managers' Index for manufacturing in the eurozone also indicates a considerable drop, falling by 4.4 points to 44.8 points. While Germany, the most significant trade partner for Austrian industry, saw a still relatively manageable drop in the provisional Purchasing Managers' Index, to 45.7 points, some southern European countries in particular experienced significant industrial losses.
Strong drop in demand
The considerable reduction in the UniCredit Bank Austria Purchasing Managers' Index in March is due in large part to the huge drop in production among industrial companies. "Production output across Austrian industry saw a dramatic decline in March. The production index fell to 42.5 points, marking its lowest level since the financial crisis. The pace of this drop in production is unprecedented. The decline of almost 9 points within a single month was by far the biggest since these surveys began more than 20 years ago", says Bruckbauer.
The sharp fall in production is due not only to the restrictions on daily activity in Austria, which in some cases have necessitated the closure of businesses, but also, and primarily, to the dramatic reduction in new business. "Order volumes deteriorated considerably in March. The new orders index fell to 37.8 points. This is the biggest decline in new business since the financial crisis, due largely to a drop in new export orders, which has been exacerbated by border closures, quarantine measures and business interruptions in trade partner countries", says UniCredit Bank Austria Economist Walter Pudschedl. As a result of the strong drop in demand, the cushion of orders among domestic businesses has been reduced considerably despite the simultaneous fall in production, and many more orders have been processed than were placed as new orders.
Due to the deteriorating demand situation, Austrian industry has significantly reduced purchases of raw materials and primary materials, although prices declined again in March, even more sharply than in the previous month. "Many raw materials, primarily oil, for instance, and many primary materials were cheaper to purchase in March. Furthermore, the combination of weak demand and a more competitive environment caused output prices to decline at an accelerated rate. All things considered, the costs associated with input and output price trends for domestic businesses have on average evened out compared with the previous month", says Pudschedl.
Massively accelerated reduction in personnel
In order to offset the costs associated with the significant challenges currently being experienced as a result of considerably reduced demand and supply-side restrictions, companies have begun to rapidly reduce their workforce. "The drop in the employment index to 42.7 points signals the quickest reduction in personnel since the financial crisis, despite the short-time work model already introduced by the Austrian government", says Pudschedl.
Due to the sudden slump in demand, there are also major challenges associated with inventory management. Stocks of finished goods, and thus the costs of warehousing, rose for the first time in three months. Moreover, for the first time in a year, stocks of purchases could not be further reduced, as the significant drop in the quantity of purchases was not sufficiently strong given the heavy losses in new business.
Industrial economy set to slump sharply then rally with clear countermovement
After a very difficult 2019, the sharp decline of the UniCredit Bank Austria Purchasing Managers' Index indicates that the economic consequences of the spread of the coronavirus resulted in the rapid deterioration of the recession in Austrian industry at the end of the first quarter of 2020. In addition, the outlook for the future has seen a rapid downturn.
The 12-month production expectation index for domestic businesses has halved to 30.1 points within a single month; this is by far the lowest level in history. As such, the latest survey suggests that the current situation is likely to have an increasingly significant negative impact on Austria's industrial economy in the coming months, especially given that social distancing measures to combat the coronavirus across Europe have been gradually tightened throughout March.
In addition to feeling the effects of the measures to restrict daily activity in Austria, the strongly export-focused domestic industry is being particularly badly impacted by interruptions to global supply chains as a result of quarantine measures, plant shutdowns and border closures.
"Following a decline of an average of 0.2 percent in 2019, industrial production is expected to experience a double-digit slump in the coming months. Assuming that measures to contain the spread of the coronavirus can be gradually reversed in the seond half of the year, it should be possible to limit the decline in industrial production for 2020 as a whole to around 7 percent", says Bruckbauer.
The economists at UniCredit Bank Austria expect the industrial economy to follow a V-shaped course for 2020, with a sharp slump in the coming months followed by strong upwards countermovement from the third quarter onwards. This would mean that the annual average losses for domestic industry would be lower than during the financial crisis. Furthermore, domestic industry is slightly better placed than many service sectors to withstand the impact of the corona crisis.
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;