October 20, 2022
- UniCredit Bank Austria Purchasing Managers’ Index stabilises just below growth threshold in September at 48.8 points
- Worsening decline in new orders from Austria and abroad leads to further production cutbacks
- Stock accumulation in purchasing falls significantly but inventoriesof finished goods grow sharply
- Pace of job creation rises slightly in September to fill vacancies
- Gas and electricity prices drive bigger cost increases and greater output price hikes than in previous month
- Economic picture worsens: Production expectations from businesses fall to lowest level since April 2020
The downturn in Austria’s industrial economy continued at the end of Q3 2022. “The UniCredit Bank Austria Purchasing Managers’ Index reached 48.8 points again in September. The indicator therefore remained below the growth threshold of 50 points for the second month in row, but at this stage there is no indication when compared to the previous month that the economic downturn is worsening”, says UniCredit Bank Austria Chief Economist Stefan Bruckbauer. The average indicator value for Q3 is therefore 49.7 points. Following the strong growth of Austria’s industrial sector in H1, this signals stagnation or slight recession in the industrial economy from the summer onwards.
“Although the order situation continued to deteriorate in September, domestic businesses have not cut production quite as much as in the previous month and have even upped the pace of their workforce expansion. However, purchasing volumes were again reduced considerably due to falling demand, causing stock accumulation of primary materials to slow significantly and inventory levels in finished goods warehouses to increase. Price hikes continue to increase sharply in September due to rising energy prices, which led to an accelerated increase in sales prices”, says Bruckbauer, summarising the key results from the September survey of Austrian purchasing managers.
Strong decline in new business
In September, the greatest negative impact on the current UniCredit Bank Austria Purchasing Managers’ Index was the unfavourable development of new business. For the fifth month in a row, domestic businesses recorded a drop in new orders. The incoming orders index fell to 38.6 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 September compared with the previous month. The fourth consecutive drop in production was slightly lower than in the previous month as the impact of the slump in new business was somewhat offset by processing orders on hand. As a result, the production index rose slightly to 46.7 points but remained well below the level that signals growth”, says UniCredit Bank Austria Economist Walter Pudschedl.
The delayed adjustment to the decline in new business led to a rapid reduction in orders on hand in the domestic industrial sector in September. The corresponding index fell to its lowest level in more than two years at 42.6 points. Orders on hand also fell due to orders being postponed or cancelled as a result of the uncertain outlook, the sharp rise in prices and substantial customer inventories. Nevertheless, delivery times increased again in September for the first time in six months due to supply bottlenecks and transportation problems delaying the delivery of intermediate goods.
Cautious inventory management
Declining demand is once again resulting in greater emphasis on cautious and cost-focused stock management. Stocks of primary and raw materials increased at a much slower rate in September than in previous months, although existing supply problems led some businesses to continue increasing their inventories as a precaution. “The increase in stocks of primary materials has slowed compared to the previous month, but rose more rapidly than the purchasing volume once again in September. The increase in inventory levels in delivery warehouses was the fifth in a row and also the second strongest in history. This demonstrates that production has so far not been adapted to take account of the weakening demand quickly enough and action is likely to accelerate over the coming months”, says Pudschedl. Declining demand makes it increasingly difficult for businesses to send the goods to market, particularly given that many customers have cancelled their orders or delayed order acceptance.
Despite the drop in production due to declining demand, more Austrian businesses hired new employees in September. The hires stem primarily from filling vacancies created following the strong expansion phase of the past few months, as well as plans for upcoming capacity expansions. However, the employment index rose only slightly to 55.7 points.
Gas and electricity prices accelerate price hikes
The gradual slowdown of price increases in purchasing over the past four months was knocked off course in September by the sharp increase in energy prices. Although the increase in purchasing prices outstripped the long-term average, the price hikes remained well below the peak seen in 2021 and the first few months of 2022 due to the effects of metal and wood prices easing. Increasing cost pressure accelerated the upswing in sales prices. Around 36% of manufacturers surveyed said that they had increased their output prices in September — consumer goods manufacturers in particular.
“The extent of the increases in energy prices and output prices continues to vary across the domestic industrial sector. Not all businesses have actually been able to pass on the cost increase to their customers over the past two years. Earnings are therefore likely to have deteriorated on balance as a result of the price trends, and even more so in September”, says Pudschedl.
Recession looming
Despite the stabilisation of the UniCredit Bank Austria Purchasing Managers’ Index in September compared with the previous month, the latest survey at the end of Q3 points to a sustained slowdown in the industrial economy. The further deterioration of the external environment is a contributory factor here. The purchasing managers’ index for the manufacturing industry in the eurozone and those for its main markets Germany and France continued to decline in September and now all lie below the growth threshold of 50 points. This is reflected in the fall in new orders in Austria and in particular new orders from abroad, which triggered a decline in production. The index ratio between new orders and the stocks of finished goods indicates that the sales warehouses are sufficiently filled to be able to fulfil the reduced quantity of new business without increasing production. Production is therefore likely to drop off still further in the coming months, probably even at a higher pace.
“The continuing supply bottlenecks, the high costs of primary materials and raw materials, rising financing costs, the considerable uncertainty surrounding energy supply and the decline of the global economy fuelled further pessimism among Austrian industrial businesses in September. Business prospects for the next 12 months were reported to be at their worst since the peak of the COVID-19 crisis in the spring of 2020. The expectations index fell to just 36.4 points”, says Bruckbauer, adding: “Following strong growth in H1, industrial production is expected to stagnate in Q3 and all signs point to the beginnings of a recession in the domestic industrial sector, the extent of which will depend heavily on the energy supply situation and price trends.”
Source: Bank Austria
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