UniCredit Bank Austria Purchasing Managers' Index in August:
Decline in industrial sector continues but pace slows
- UniCredit Bank Austria Purchasing Managers' Index up in August for first time this year – at 40.6 points, however, performance remains below growth threshold of 50 points
- Production decline slows despite continuing slump in new business
- Pace of job cuts down slightly in August
- Decline in costs and sales prices eases for first time this year
- Decline in purchasing volumes and stock of purchases and first decrease in stocks of finished goods in three months signal tentative turnaround of inventory cycle
- Production expected to drop by 2% in real terms in 2023 following increase of more than 6% last year
The downturn in the Austrian industrial sector continues. "The UniCredit Bank Austria Purchasing Managers' Index sat at 40.6 points in August, falling well below the growth threshold of 50 points once again", says UniCredit Bank Austria Chief Economist Stefan Bruckbauer, adding: "However, there is renewed hope that the downturn will soon bottom out. The decline in production slowed in August and the job cuts stabilised. While the decline in new business was even more pronounced than in previous months, there has been some improvement in the downwards trend affecting purchasing and primary materials inventories. The pace of price reductions in both purchasing and sales has slowed."
Hopes that the downwards trend in the industrial sector will soon bottom out have been further bolstered by developments in the key markets for Austria's industrial economy. "The preliminary Purchasing Managers' Index for the manufacturing industry in the eurozone rose to 43.7 points in August, fuelled by improvements in the key countries Germany and France. Furthermore, and in contrast to the picture in Austria, the decline in new business (and export orders in particular) has begun to slow", says Bruckbauer.
Weak demand triggers further production cuts
The high degree of uncertainty among customers, increased costs and the more stringent financing conditions have dampened demand for goods "Made in Austria". The index for new orders fell to 32.9 points, signalling a drop in new business for domestic companies for the sixteenth month in a row. Both domestic and international new orders were down on the previous month.
"Given this continued sharp decline in demand, domestic businesses scaled back production significantly in August. That said, the slight increase in the production index to 43.2 points does indicate that the pace of the decline has at least slowed somewhat", says UniCredit Bank Austria Economist Walter Pudschedl, adding: "Domestic producers, however, scaled back production more sharply than producers in the eurozone as a whole. The close links with the German industrial sector, which has made particularly severe reductions to production capacity in the face of limited demand for exports, are currently proving to be a burden."
Job cuts slow slightly
"In August, the employment level in the domestic industrial sector fell for the fourth month in a row. For the first time, though, the pace of the decline slowed", says Pudschedl. The employment index increased to 46.5 points. Despite similarly strong declines in both demand and production, the extent to which personnel capacity has been adjusted to reflect the lower utilisation rate is therefore much more limited than it was during the financial crisis or the COVID-19 pandemic. Given the shortage of supply on the labour market, skilled workers are evidently being kept on by businesses despite utilisation issues.
Trend reversal imminent for inventory cycle?
Sluggish order performance saw domestic businesses reduce orders for primary materials once again in August. The six-month downwards trend in this area did lose some momentum though — as evidenced by the fact that delivery times began to increase once more and stocks of purchases declined at a slower rate. Inventories fell at a slower rate than purchasing volumes. Although the index ratio of stocks of purchases to stocks of finished goods sits squarely in a range that indicates a significant downturn in the industrial sector, the ratio did improve in August and thus provides a further indication that a trend reversal with the inventory cycle and economic performance may be imminent. In addition, stocks of finished goods decreased slightly in August for the first time in four months.
Price trends point to improved earnings situation
Just as the pace of the decline in purchasing volumes slowed compared with July, so too did the pace of the decline in purchasing prices. In particular, higher fuel costs offset the reduction in the price of various commodities and the lower energy costs. The lower costs saw competition for customers generate a further reduction in output prices. However, businesses were much more cautious in how these lower costs were passed on to customers than in the previous month.
"Buoyed by falling input prices, domestic industrial businesses were able to shore up their profit margins despite weak demand. As the decline in costs was once again stronger than the reduction in output prices, the earnings situation of domestic businesses in August improved even further on average", says Pudschedl.
No prospect of economic upturn in industrial sector before end of 2023
Sitting at just 40.6 points, the UniCredit Bank Austria Purchasing Manager´s index for August shows that the domestic industrial sector is still in recession at the mid-point of Q3 2023.
"The first increase in the overall indicator this year, the current inventory and price trends and the stabilisation of the decline in demand in the key export markets are bolstering hopes that the downwards cycle could soon come to an end", says Bruckbauer. The improved index ratio of new orders to inventories held in sales warehouses and the slight increase in the production expectations of businesses over one year to 43.7 points also back up this picture.
"The industrial sector has suffered clear losses in recent months. Although the downwards trend is now closer to bottoming out, there is likely still some way to go. A true economic turnaround in the domestic industrial sector is therefore no longer likely in the current year", concludes Bruckbauer, adding: "For 2023 as whole, we now anticipate a production drop of up to 2% in real terms, with Austria's industrial economy not likely to return to growth until Q1 2024."
Enquiries:
UniCredit Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0)5 05 05-41957;
Email: walter.pudschedl@unicreditgroup.at