UniCredit Bank Austria Sector Development:
The corona crisis spares only a few economic sectors
- As a result of the corona crisis in 2020, UniCredit Bank Austria's economists expect economic output to be 10 per cent lower in nominal terms than usual, which corresponds to a minus of EUR 36 billion
- The industry has to expect a decrease in value added of 13 percent; consumer goods manufacturers, with the exception of supply-related sectors, will suffer disproportionately
- Although construction has seen considerable losses across all sectors, it should be able to cope with the crisis relatively well
- Very high losses will affect some retail and tourism-related sectors; in these segments, value added will fall by up to 40 per cent in 2020
- Business-related service industries are affected in very different ways
Positive economic development at the beginning of 2020 came to an abrupt end with the outbreak of the corona crisis, in March at the latest. Over the course of April, the crisis affected all sectors of the economy and almost all industries. A recent analysis by UniCredit Bank Austria on the impact of the crisis on the individual sectors assumes that, despite the first easing of restrictions, Austria's economy will only reach around 75 to 80 per cent of its normal performance in the second quarter. Moreover, the expected recovery from the current economic downturn in the second half of the year, although impressive, will not be sufficiently strong overall to allow consumer demand and investment to return to their pre-crisis growth path this year.
The impact in 2020 of the corona crisis at sector and industry level is essentially based on the assumption of a two-month "freeze" of public and therefore also economic life, followed by at least two "recovery months" with restricted activities. The assessment of the impacts of catch-up effects in the second half of the year is based on a balanced approach.
Many industries that are suffering acutely from the lockdown share common ground: they will not be able to compensate for the loss of revenue even after the measures have been lifted. Among others, these are the providers of personal services or cultural and sports organisers. "Assuming a gradual revival of economic activity from May, we expect nominal economic output in Austria to be around 10 per cent or EUR 36 billion lower for the full year 2020 compared to a scenario without the effects of the pandemic", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.
Industry faces considerable setbacks in part
Industrial production began to slow back in 2019 and fell by 0.2 per cent for the year as a whole. However, the recovery that was still expected at the start of 2020 based on companies' relatively optimistic economic forecasts ended as early as February. According to provisional figures, the production output of capital goods manufacturers fell by around 10 per cent in February compared with the previous year. The result is likely to be the consequence of the early collapse of the international supply chains in some sectors.
"With restrictions in key supply and sales markets continuing into May, at least, the industry is expected to suffer a stronger setback than the economy as a whole in 2020. Compared to the baseline scenario, we expect a nominal decrease in industrial value added of 13 per cent and a loss in value added of around EUR 8.5 billion", says UniCredit Bank Austria Economist Günter Wolf. All in all, this represents almost a quarter of the total loss in value added that Austria is expected to experience in 2020. By comparison, the industry contributes 19 per cent to economic output.
At sector level, food manufacturers are also being affected by the lockdown, as can be seen from the sharp increase in the number of registered unemployed workers in March alone. However, in its function as a supply-relevant sector, the industry, like the pharmaceutical industry, has little to fear of a drop in demand for the year as a whole. Unlike other consumer goods industries, such as the manufacture of clothing, furniture, and game and sports equipment, which have lost an important sales channel not only with the lockdown of retail. In addition, demand for durable consumer goods is expected to pick up slowly, hampered by job market uncertainties and the loss of income across large sections of the population.
The downturn is likely to be less severe in investment-related industries that directly or indirectly manufacture products for the construction industry. However, capital goods manufacturers that are closely integrated into international supply chains and that export the bulk of their products will have to face greater setbacks. At present, the economic outlook for 2020 for key domestic industry export markets is in some cases considerably more bleak than at home. Car suppliers, the steel industry, parts of the metal/plastic goods manufacturing and electronic product manufacturing sectors have been particularly affected.
Ultimately, the crisis will also have very different effects on capital goods manufacturers, as shown by the results of a recent company survey in the areas of metal production, metal processing and mechanical engineering. According to this, most companies reported a significant fall in their capacity utilisation in April. At the same time, the shares of companies that have come to a complete standstill and those who have not had their production activities affected, are roughly the same with 7 to 8 per cent each.
The construction industry will suffer considerable losses, but will cope with the crisis relatively well
Back in 2019, the construction industry recorded a 9 per cent increase in sales and, until the crisis erupted, continued to benefit from stable orders as well as favourable weather conditions in 2020. Most recently, in March, companies assessed their business situation as similarly positive to the average trend over the last three years where growth was strong. Equally positive signals came from the building materials industry, which in the first quarter still benefited from a high level of orders from the construction industry and the supply chains, which were predominantly national and functioning well.
The effect of site closures as of March and the loss of foreign labour, expected to continue for some time, is being felt across all three central construction segments. However, the more labour-intensive segments, structural engineering and construction, are expected to see more significant revenue losses than civil engineering (work had already resumed on some road and tunnel construction projects at the start of April). For example, commercial construction will suffer considerable setbacks in 2020, not just in the retail or tourism sectors. In addition, a considerable reduction in residential construction must be expected, compared with the dynamism seen in previous years.
However, since there is still excess demand, not only in residential construction, the overall growth prospects of the construction industry (of course depending on the actual duration of the lockdown) remain for 2020. Nevertheless, the sector will suffer the strongest setback in decades. For the whole of 2020, the UniCredit Bank Austria economists expect a loss in value added for the construction sector of 11% or EUR 2.9 billion, compared to the baseline scenario.
Trade is seeing a very negative slide in part
As a result of the corona crisis, the value added in trade is expected to fall by 12 per cent or EUR 5 billion respectively compared to the baseline scenario. However, the loss is spread very differently across the individual sectors. The motor vehicle trade was already in crisis mode before the start of the lockdown, as illustrated by the massive drop in car registrations during the first quarter of more than 30 percent. In March, the strongest decline in business expectations since the survey began pointed to imminent sales losses. Even if the motor vehicle trade can look forward to catch-up effects and rising sales figures in the second half of the year, the sector is threatening to lose value of at least 25 per cent overall in 2020 compared to the baseline scenario. The downturn for garages should be somewhat more moderate.
With mobility restricted, the demand for fuel has dropped. In addition, recent weeks have seen fuel prices fall to their four-year low. Even if petrol stations, as an essential supply sector, did not have to close down and were able to generate additional sales with their shops, a drop in sales in 2020 will be inevitable. Other retail sectors that were exempt from the lockdown measures, notably food retailers, pharmacies and chemists, are hardly affected by the crisis. On the other hand, traders who offer durable consumer goods and have had to close their businesses are expecting massive losses in some cases. If retailers are not able to increase their trading activities online, they will not only lose the demand of local customers during the lockdown period; they will also lose a significant portion of tourist revenue later in the year.
The effects of the corona crisis on wholesale, which contributes around half of trade value added, are comparatively moderate, but also negative overall. A decline in value added in 2020 of around 10 percent compared to the baseline scenario is to be expected. The sector has the advantage that many transactions are conducted without customer contact and that in most cases they have not suspended deliveries to industry, construction and food retailers. That said, wholesalers too will find it hard to compensate for the considerable losses in catering business.
Service industries are affected in very different ways
The individual service sectors are affected by the corona crisis in very different ways. For example, IT service providers, which have been among the fastest growing service industries for years, should be able to maintain this position in 2020. This is particularly true in light of increased demand for online or remote working infrastructures. At the same time, demand for the services of telecommunications operators is also growing.
In the transport sector, for example, parcel delivery services will survive the crisis relatively unscathed, although the industry will not be able to avoid a loss of revenue. It is likely that companies will not be able to offset the total decline in B2B orders with additional orders in the B2C segment. Last but not least, parcel delivery services have been suffering from strong competition and price pressure for years.
In 2020, by contrast, freight transport, as well as other business service vendors, including employment agencies, building cleaners and security services, will suffer significantly from the decline in the industrial and export economy. As with transport services, these industries cannot expect any significant catch-up effects. Economic output is expected to fall by 15 per cent to 25 per cent. Some freelance and technical services may be able to recover at least part of the demand shortfall in the second half of the year, for example the legal advisory or business consultancy sectors. We see a loss in value in this area of a moderate 10 percent in 2020.
Huge losses in tourism
"The tourism sector is expecting particularly huge losses, and will have to cope with both the enforced closure of the businesses and the loss of domestic and foreign demand. Moreover, demand for tourism will recover only very slowly even after the restrictions have been lifted, especially as the travel budgets of large swathes of the population will have shrunk significantly due to the loss of income", says Wolf.
Depending on the duration of the crisis, Austria's tourism is still expected to benefit from the economic recovery in 2020. This is supported, on the one hand, by the fact that in times of crisis long-distance travel loses out in favour of closer destinations, and, on the other hand, by the fact that large European tourism markets are likely to be burdened longer than Austria by the pandemic restrictions. Nevertheless, accommodation companies and the restaurant industry must expect a decrease in value added of around 30 percent in 2020. Compared to the baseline scenario, this represents a loss of almost EUR 6 billion or around 17 percent of the estimated total loss in value added of the economy as a whole.
Limited possibilities for excursions and restricted travel have also resulted in turnover erosion for the passenger transport sector, car rental companies, travel agencies and cultural and sports events organisers. As barely any catch-up effects are expected to be seen in this area, the UniCredit Bank Austria economists expect nominal value added to decline by at least 25 per cent to 40 per cent in 2020, compared with the baseline scenario.
UniCredit Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0)5 05 05-41954;