UniCredit Bank Austria Purchasing Managers' Index in April:
Unprecedented break in thread of industrial development with prospects of recovery
- In April, the UniCredit Bank Austria Purchasing Managers' Index fell to a record low of 31.6 points
- A collapse in demand led to the strongest reduction in output to date
- Thanks to the short-term work model, the pace of the cut of wirkforce numbers was somewhat lower than that of the 2009 financial crisis
- Declining prices in purchase and sales for almost a year
- Industrial activity is expected to hit its low point in April. Recovery from Q3 should limit industrial production losses to less than 10 percent in 2020
After initial setbacks at the beginning of spring, the Austrian industrial economy has now collapsed. "Following the interruption of global value chains, which had already noticeably affected the industry in March, the restriction measures implemented worldwide in April to slow the spread of the coronavirus caused an even sharper slump in the industrial economy. At 31.6 points, the UniCredit Bank Austria Purchasing Managers' Index has now fallen below the lowest level reached during the financial crisis of January 2009", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. Compared to the financial crisis, the current decline in the industrial economy has not only been somewhat stronger, but above all considerably faster. Within just two months, the UniCredit Bank Austria Purchasing Managers' Index fell from the value range of above 50 points, signalling growth, to a new record low, having lost almost 20 points. More than 14 of these points were lost in April alone. During the financial crisis, the strongest monthly decline observed was just over 5 points, and it took more than six months to reach this low point.
"This is the strongest and relatively fastest decline in the more than 20 years that the UniCredit Bank Austria Purchasing Managers' Index has been calculated, and has been caused by the sharp drop in demand from Austria and abroad, which led companies to reduce production substantially and make major redundancies. The current situation is different to that of a normal downturn. Suppliers´ delivery times have been extended and stocks of purchases have increased due to disruptions in the supply chain — without this development, the drop in the indicator would have been significantly stronger", explains Bruckbauer.
Unprecedented collapse in production
The measures to restrict daily activity in Austria have in some cases necessitated the closure of businesses and caused the sharpest drop in demand on record. In addition to weak new business, the Austrian industry also faced large-scale postponements or even cancellations of orders, as well as a general reluctance of consumers to spend or invest their money. Only a few sectors were able to benefit from a somewhat stronger demand from China as well as an increase in the need for medical equipment.
"Domestic industry output fell to a record low of 17.2 points due to weak domestic and foreign demand, the interruption of global value chains, border closures and the lockdown imposed in Austria itself. In April, more than 70 percent of domestic businesses reported a fall in production. The consumer goods industry experienced particularly strong losses", explains UniCredit Bank Austria economist Walter Pudschedl. Despite the sharp drop in production and temporary closures, the backlog of orders from domestic companies continued to decline rapidly. Once again, many more orders have been processed than new ones placed.
Difficulties with inventory management
Managing inventories of Austrian companies was particularly difficult throughout April. "Due to the lack of demand and the rapid adjustment of production, it was difficult to implement inventory cost optimisation in April. Inventories of both materials and finished goods increased — even stocks of finished goods amassed at record speed", says Pudschedl.
This increase in inventories held in finished goods warehouses was not only due to lower sales, but also problems with delivering the goods to customers caused by border closures, tighter freight controls and transport interruptions. These disruptions on the supply side led to suppliers´ delivery times being extended for the third consecutive month, which is contrary to the trend of a normal downturn. In addition to the unexpected sharp decline in production, there was also a deliberate precautionary stockpiling of inventories in stocks of purchases to ensure the supply of raw and primary materials for future production needs.
Prices continue to decline
The stockpiling of raw and primary materials was not enough to prevent the record drop in purchasing volumes of Austrian companies in April as a result of the weak order volumes, even though prices were down again in April compared to the previous month. "Many raw materials, primary oil, for instance, and many primary materials were cheaper to purchase in April than they were in the previous month. That said, the increase in competition in the weak demand environment triggered output prices to decline at an accelerated rate. On the whole, the costs associated with input and output price trends for domestic businesses have on average been higher than in the previous month", explains Pudschedl.
Reduced working hours to cushion reductions in personnel
In April, the changes in production capacities in line with the significant drop in demand was also reflected by a sharp reduction in jobs by means of terminations, the non-renewal or cancellation of contracts, and taking advantage of workers going into retirement. The employment index fell by almost 10 points in one month to 33.3, the lowest in 11 years. "Although the job cuts in Austrian industry are significant, they are considerably mitigated by the coronavirus short-time work model. This is made evident by the fact that, for April, the employment index at 33.3 points is well above the production index at 17.2 points. Also, despite the fact that production has already fallen much more sharply than during the financial crisis, fewer jobs have been lost in manufacturing since the onset of the Corona crisis", explains Pudschedl. At the height of the financial crisis in March 2009, the employment index reached only 29.9 points.
Stabilisation of the industrial economy at a low level from May
Following a significant drop in April to a record low of 31.6 points, the current UniCredit Bank Austria Purchasing Managers' Index indicates the expected collapse of the industrial economy. Following the problems seen in recent months due to disruptions to global value chains primarily caused by quarantine measures and business interruptions in China, the lockdown measures taken in April to help slow the spread of coronavirus across Europe, and also in Austria, led to an unprecedented disruption to industrial development.
According to UniCredit Bank Austria economists, the current indicator value is likely even to underestimate the true extent of the industrial collapse. This is because the factors that are dampening the decline of the indicator, such as extensions to delivery times and the stockpiling of materials caused by disruptions on the supply side, are atypical for a downturn. With a drop to just 17.2 points, the production index is a better indicator of the actual extent of the decline in business in Austrian industry, in which April saw 70 percent of the companies questioned report a decline in output, with some even reporting that production had ceased entirely.
Given the worsening economic environment, production expectations have further deteriorated compared to the previous month. This is also reflected in the similarly sharp drop in the provisional Purchasing Managers' Index for the manufacturing industry in the eurozone to 33.6 points, in addition to a drop in the output index to 18.4 points. "The 12-month production expectations index for domestic businesses fell to a record low of 29.2 points. Hopes for a very rapid recovery from the Corona crisis have diminished in Austrian companies. There has been increasing concern about measures perhaps being prolonged or tightened to combat the spread of coronavirus, which would have a lasting impact on demand and the willingness of consumers to invest in the longer term", explains Bruckbauer.
With restrictions already being relaxed, as will probably be the case in the coming weeks, the business environment for the Austrian industry will gradually improve again. April should therefore mark the low point of the Corona crisis for Austrian industry. "Following the significant collapse in April, the industrial economy should be able to stabilise at a low level in the coming weeks. However, a substantial recovery can only be expected with a more considerable easing of measures. We expect an upturn to start in H2, which will limit the drop in industrial production for 2020 as a whole to under 10 percent," according to Bruckbauer. This would mean that the losses suffered by the Austrian industry during the Corona crisis would be less than in the financial crisis in 2009, when production fell by 12.7 percent.
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;