UniCredit Bank Austria Purchasing Managers' Index in October:
Slowdown in Austrian industrial economy accelerating
- UniCredit Bank Austria Purchasing Manager’s Index falls to 46.6 points in October, placing it below growth threshold for third consecutive month
- October sees Austrian businesses reduce output more than in previous month; drop in incoming orders from domestic and foreign buyers accelerating
- Pace of job creation rises slightly again in October to fill vacancies
- Costs rising less quickly, but sales prices still increasing rapidly
- Stocks of primary materials increase in October despite sharp drop in purchasing volume, while inventory levels in finished goods warehouses rise despite cuts in production
- Significant slump in short-term outlook but minimal decline in production expectations for year as a whole support assumption that recession in industry is only short term
The downturn in Austria's industrial economy continued at the start of the final quarter of 2022. "The UniCredit Bank Austria Purchasing Managers' Index decreased to 46.6 points in October. This means that the indicator was below the growth threshold of 50 points for the third month in a row, in turn signalling an acceleration of the economic downturn in Austrian industry compared with the previous month", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer.
This has significantly reinforced the signs that domestic industry has already entered a recession. "In October, companies reduced their output slightly more than in the previous month, as new business continued to slump. The purchasing volume was significantly reduced, but stocks of primary materials increased. Due to poor demand, stock in sales warehouses also increased; but costs increased less quickly than before. The increase in sales prices abated only slightly. The sustained positive employment trend continues to provide a glimmer of hope", says Bruckbauer.
The downward trend in Austrian industry is progressing at the same pace as in Europe as a whole. "The preliminary Purchasing Managers' Index for industry in the eurozone likewise fell to 46.6 points in October. Compared to the European trend, however, October saw Austrian industry exhibit a somewhat bigger slump in demand, especially from abroad. The situation on the labour market, by contrast, was clearly better than in the eurozone. Specifically, this means that the Austrian survey result was closer to that of Germany, whose results nevertheless signal a somewhat sharper slowdown in the industrial economy than Austria, with the Purchasing Managers' Index falling to 45.7 points", says Bruckbauer.
Drop in demand
In October, the greatest negative impact on the current UniCredit Bank Austria Purchasing Managers' Index was the highly unfavourable development of new business. For the sixth month in a row, domestic businesses recorded a drop in new orders. The incoming orders index fell to 32.9 points, which is the lowest value since May 2020.
"In view of the significant decline in demand both from within Austria and from abroad, Austrian industrial businesses once again scaled back production in October compared with the previous month. The fifth consecutive drop in output was greater than in the previous month too, since the extent to which the slump in new business can be offset by processing orders on hand is now limited. The production index sank to 45.1 points and consequently remained well below the level that signals growth", says UniCredit Bank Austria Economist Walter Pudschedl.
Surprised by declining demand
Domestic businesses reacted to the sharp decline in demand by significantly reducing the volume of primary materials and raw materials they purchased. The corresponding index fell to 40.8 points, the lowest value since the height of the pandemic. "Domestic businesses may have been somewhat surprised by the scale of the fall in demand. Their adjustment to lower production requirements was so restrained that stocks primary of materials increased in October, even more so than in the previous month. Stocks in finished goods warehouses continued to increase as well, as customers' growing reluctance to spend due to fears of recession often prompted them to cancel or postpone their orders", says Pudschedl. Nonetheless, some companies have increased their stocks out of caution in order to avoid production bottlenecks due to delivery delays.
Costs rising slightly less quickly
Supply problems have now eased markedly due to significantly lower demand, however: In October, delivery times in Austrian industry increased to the lowest extent for two years. "The cost dynamics in purchasing slowed down, but remained above average given that the pressure caused by energy prices on the supply side dropped very little. Sales prices were raised at an above-average rate too, but likewise at a slightly slower pace than in the previous month", says Pudschedl, adding: "Domestic industrial companies were once again unable to pass the average cost increase on to their customers in full. Earnings are therefore likely to have deteriorated on balance as a result of the price trends, albeit not quite as much as in the past two years."
Pent-up demand for labour
Despite dwindling demand, employment in domestic industry continued to rise and even rose at a higher rate than in the previous month. The employment index climbed to 56.2 points in October. During the very dynamic recovery phase following the height of the pandemic in spring 2020, the increasing demand for labour could not be met quickly enough; consequently, despite production capacities being adapted to meet this falling demand, there is still some catching up to do.
This sustained high demand has further exacerbated the shortage of labour in Austrian industry. At the start of the fourth quarter, there were almost 15,000 vacancies in the domestic manufacturing sector. But there were just under 20,000 job seekers looking for work, meaning that there were on average 1.4 job seekers in Austria for every vacancy. The labour shortage was particularly problematic in Salzburg, Upper Austria and Tyrol, where the ratio of applicants to jobs is below 1. With an unemployment rate of 3%, the domestic industrial sector is currently experiencing virtually full employment", says Pudschedl.
UniCredit Bank Austria economists predict that, after an average of 4% in 2021, the unemployment rate in domestic industry will fall to just over 3% in 2022. The unemployment rate will therefore be significantly lower than it was before the outbreak of the pandemic, and less than half that of the economy as a whole (6.3%). Whereas an unemployment rate of just over 2% in the regional manufacturing sector can be expected in 2022 for Upper Austria and Tyrol, the highest level will continue to be seen in Vienna, at around 6.5%.
Industry already in recession
At the beginning of the fourth quarter, the UniCredit Bank Austria Purchasing Managers' Index deteriorated to 46.6 points compared with the previous month, meaning it now lies well below the growth threshold of 50 points. In particular, the sharp decline in incoming orders both from Austria and abroad is dampening the outlook for Austrian industrial companies, which, for the fifth month in a row, have indicated that they have cut their production output compared to the previous month. The order-to-stock ratio deteriorated again in October, which continues to indicate that with the present stock levels in sales warehouses, the smaller order volumes can be fulfilled even if production capacities are lower. Production is therefore likely to drop off still further in the coming months, probably even at a higher pace than previously.
The pessimism in Austrian industry increased significantly at the beginning of the fourth quarter. "Rising purchasing prices (particularly for energy), higher financing costs and declining demand have further reduced the business outlook for the year, and it is now at its lowest level since the height of the pandemic in spring 2020. However, the decrease in the expectations index to 36.2 points was only minor", says Bruckbauer, adding: "Domestic industry has obviously already entered a recession. However, the far-reaching stabilisation of business expectations, the resilient labour market, the easing of supply problems and the prospect of a gradual easing of cost dynamics support our assumption that the period of weakness in Austrian industry over the winter will be relatively short and mild."
Following an increase in industrial production of up to 5% on average in 2022 due to the strong first half of the year, UniCredit Bank Austria economists expect that, assuming no further geopolitical escalation, domestic industry will stagnate in 2023 as a whole due to a poor start to the year.
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at