UniCredit Bank Austria Purchasing Managers' Index in May:
The pace of the downturn in Austrian industry is already slowing significantly
- Despite the strongest monthly increase in the Purchasing Managers' Index to date, the threshold of 50 points, which signals growth in the industrial sector, has still not been reached
- After the record low in April the indicator is still at just 40.4 points, despite having improved by almost 9 points
- The drop in production output among Austrian companies is now slowing, keeping pace with the situation with the decline in new business
- Employment levels in domestic industry continue to decline, but at a slower pace
- The drop in input and output prices is accelerating
- Weak demand caused stocks of finished goods to reach a record high
- After the low in April, the production expectations index also rose in May, by more than 10 points to 40.6 points
- A significant upturn is expected in H2, which should limit the drop in industrial production for 2020 as a whole to under 10 percent
Despite the strongest monthly improvement to date, the decline in the Austrian industrial economy that began in March 2020 continues to have an impact and the indicator is still significantly below the threshold of 50 points that would signal growth in the industry. "The slump in domestic industry as a result of the coronavirus crisis began to slow in May as the easing of lockdown measures got under way. The UniCredit Bank Austria Purchasing Managers' Index rose by almost 9 points from its record low in the previous month to 40.4 points", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. "After the slump in April, the current UniCredit Bank Austria Purchasing Managers' Index indicates a slower but nevertheless strong decline in production and new business, even when compared with the very weak previous month. Employment levels have therefore continued to decline, albeit at a slightly slower pace. The drop in input and output prices, and in particular the sharp increase in stocks in finished goods, point to a continuation of the challenging situation with demand", says Bruckbauer.
A lack of new orders is forcing companies to significantly reduce production once more
Despite the gradual easing of the lockdown in Austria, which began in mid-April, Austrian industrial businesses reduced production again in May, although the rate of this drop in output has noticeably decreased. The production index rose to 36.5 points in May after a record low in the previous month. This means that the index is now at least slightly higher than it was at the peak of the financial crisis at the turn of 2008/2009. The consumer goods industry even saw a moderate upturn, and although the intermediate and capital goods industries did once again report losses, they were at a slightly lower level than in the previous month.
"This continued decline in production in May is partly a result of measures that have affected production, but is mainly due to the ongoing lack of demand. New orders from Austria and abroad fell sharply again in May. The closure of consumer plants, logistical problems and the general restraint of customers due to ongoing uncertainty are responsible for this decline", says Bruckbauer. Consumer restraint outside Austria was particularly strong in May due to measures taken to combat the spread of the coronavirus remaining largely unchanged in many European countries and the USA.
Despite an increase to 30.1 points, the export orders index underperformed the total new orders index of 31.9 points, although some companies experienced some tailwind from Asia and the European construction industry. As a result of the continuing stagnation of new business, the backlocks of work among domestic businesses was reduced in May despite the strong drop in production and isolated interruptions to production. The volume of new orders in May was therefore lower than the volume of completed orders.
Employment levels continue to decline for the third consecutive month
In May, domestic businesses continued to cut jobs to bring production capacity into line with the drop in demand. The sharp rise in the employment index to 41 points shows that the pace of the decline in employment levels has at least slowed compared with the previous month. "After a stable employment situation in domestic industry at the beginning of the year, many jobs have been lost due to the coronavirus crisis since March. Meanwhile, the unemployment rate in this sector is almost 6%, which is more than two percentage points higher than the previous year", says UniCredit Bank Austria Economist Walter Pudschedl.
When compared with the economy as a whole, the unemployment rate in the industrial sector has risen relatively less during the crisis and is currently only half as high. While the job market in the services sector has already gained a certain amount of momentum now that the easing of lockdown measures has begun, the employment rate in the industrial sector is expected to recover more slowly due to its high level of dependence on exports among other factors. At 5%, the average unemployment rate in the industrial sector in 2020 is likely to be significantly lower than the expected rate of 11% for the economy as a whole, but significantly higher than the 3.7% seen in the previous year, say UniCredit Bank Austria economists.
Price trends and inventory management dominated by weak demand
Driven by reduced demand, the decline in prices for raw materials and semi-finished goods accelerated further in May; crude oil and related products such as energy, fuels and plastics were particularly affected. There has not been a drop in purchase prices as sharp as this since summer 2012, yet despite this Austrian companies have once again significantly reduced their purchasing volumes compared with the previous month. However, the significant drop in production has led to a slight increase in stocks of primary materials.
"Austrian industrial businesses have tried to counter the weakening demand by offering discounts. The last time sales prices fell as sharply as they did in May was 11 years ago. Despite this, the strongest monthly rise to date in stocks of finished goods indicates that even significant price reductions were not able to sufficiently stimulate demand in May", says Pudschedl. In addition to a reduction in demand, inventory levels have also risen as a result of delivery problems. Conversely, some Austrian industrial companies have deliberately increased their inventories in anticipation of an increase in demand.
Low point reached but recovery is slow
The current improvement in the UniCredit Bank Austria Purchasing Managers' Index to 40.4 points based on an increase in the production output, new orders and employment indexes shows that domestic industry has not yet completely transcended the economic low seen in April. Despite the initial easing of lockdown measures in Austria, the measures implemented to combat the spread of the coronavirus across Europe and the US were still preventing a more rapid recovery. Both the current overall index and the production expectations index for the next 12 months remain well below the growth threshold of 50 points. The preliminary Purchasing Managers' Indexes for both the eurozone, which rose to 39.5 points, and the USA, which rose to 39.8 points, show that there has not yet been any significant improvement in the economic environment for the export-dependent Austrian industrial sector.
However, with the gradual easing of lockdown measures both in Austria and abroad, the business environment for Austrian industry is expected to improve in the coming months. "Austrian industry has not been able to accelerate out of the blocks following the economic slump in April. Demand, particularly from abroad, is growing very slowly. The lack of demand as a result of uncertainty among consumers and producers will only resolve gradually over the coming months. However, we remain optimistic and anticipate a significant upturn in H2, which should limit the drop in industrial production for 2020 as a whole to under 10 percent", says Bruckbauer. Assuming that the coronavirus pandemic does not see a second wave, domestic industry is likely to steer a smooth course of growth once more in 2021.
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;