Austria PMI rebounds; Europe picks up

 Austria is in a sense an entrepôt economy.  It's at the centre of trade in Eastern Europe, bordering Germany, Italy, Czechia, Switzerland and Slovakia, and close to Poland, and its economy closely parallels the pan-Europe economy.  The rebound in the PMI over the last few months is much more obvious in Austria than in Europe, which suggests to me that Europe is at last moving towards economic recovery.

What will happen with Trump throwing a spanner into the works with his sharp tariff increases is hard to tell.  But a jump in tariffs on imports from Europe into the USA will slow growth, and the response of governments and the ECB will be to roll out stimulatory measures to offset that.

Austria's PMI slumps to a new low

As I've mentioned before, the state of Austria's economy gives a good guide to how the whole of Europe's going.  Exports equal 56% of Austria's GDP.  If manufacturing is slumping in Austria, it's mostly because Europe is sliding.  Compare the difference here with large continental economies like the United States. 

After extreme adjustment, Austria's PMI is now lower than during the Covid crash.  That's because my extreme-adjustment algorithm regards a downward spike lasting just 2 months as an aberration (outside the 2 sigma limit for the error term, if you want to get technical).    Business confidence, which, as you'd expect, correlates reasonably well with the PMI, recovered in December, January and February, paralleling the bump in the PMI, but fell again since then.   

I remain convinced that there will be a European recession.  We've had a mini bounce in the European economy, and that's now over.

[See also Austria: PMI vs Business Confidence]

Click on chart to see a clearer image.

Austria's PMI falls again

 As I've commented before, Austria is an entrepôt economy, at the centre of Europe.  If Austria's PMI falls, it's pretty likely that this reflects weakness in Europe as a whole.  We have Austria's April PMI (down) and Europe's provisional (flash) PMI for April (also down).  I've no doubt that the final PMI for Europe will confirm the provisional estimate.  The brief rebound is over (though not in services, not yet).

Europe makes up ±18% of the world's GDP.   The other biggies are the USA (21%) and China (these days, prolly ±15%, though the data are rubbery---I need to revise the weights I use.)  China's post-covid rebound appears to be fizzling.

Click on chart to see clearer image.

Austria PMI falls in March

 The PMI for Austria is the first release of "final" PMIs each month.  Its importance isn't because it's a large economy: it makes up just 0.5% of the world economy, and about 2.2% of the EU economy.  It's an entrepôt economy, in a sense, a sort of "canary in the coal mine".  If Europe does well economically, so does Austria, and if Europe slumps, Austria does too.  So the fall in Austria's PMI is significant.  (As it happens, the "flash" PMI for Europe fell in March too.)  

Europe's 'recovery' stutters

 As often, Austria, a European entrepôt economy, is strongly correlated with overall Euro Zone economic activity.  A little uptick in economic activity has stuttered.  Even though natural gas prices have plunged, Europe is starting to respond to the ECB (European Central Bank)'s monetary tightening.

Austria's PMI is the actual number for February; Europe's is the "flash" (preliminary) estimate.

Austria PMI good indicator of Euro econ

 Because Austria is an entrepôt economy, at the heart of Europe, its PMI has a good correlation with overall European industrial production.   

Austria's PMI strongly correlates with Europe's PMI.  So far, we only have the provisional estimate of the EURO zone's PMI, but I have no doubt its sharp decline in August will be confirmed when the final numbers come out.

More PMI slippage

 Austria's PMI comes out a couple of days before Europe's.   It fell in May, and Europe's 
flash" estimate did.  It's well correlated with Europe's PMI, because it is an entrepôt economy which is embedded in Europe, and because like Europe it depends on international trade.  As such, the key is the rise in inflation, which is affecting demand.  Bank Austria's/IHS Markit's headline was: Manufacturing sector continues to lose momentum as sharply rising prices hit demand 

Central Banks can either ignore this rise in inflation, arguing that it is temporary, or they can tighten policy against it.  I'm sure that this rise in inflation is more permanent, because of the breakdown of supply chains due to Covid and war.  Even if it isn't, rising inflation will reduce real incomes, leading to a recession.  And if CBs respond to inflation by upping rates, that will also lead to a recession.  The last time we had commodity prices rising this strongly (and it's not just fuel and gas; it's also food prices) in 1972/73, we had a deep recession in 1974.  It's going to be an interesting ride.

Euro economy comes off the boil

 The Austrian PMI comes out first among Europe's PMI.  It's well correlated to pan-Europe's PMI which is logical given its economy's entrepôt nature.   Remember that the PMI is a diffusion index, i.e., it's closer to a rate of change than a level.  In other words, even if the PMI  is declining, the economy may be advancing, just more slowly. 

Austria's PMI fell in October, as did the provisional ("flash") Euro PMI.  Key factors according to IHS Markit: 

• slowest rise in new orders since January
• longer lead times on materials and components
• output price inflation hits a new record high as cost pressures intensify.

We are still not back to "normal" after the Covid Crash.  And normal will mean slower growth than we've seen over the last year, so expect Europe's PMIs to drift lower over the next few months.

Austrian bellwether

As I've mentioned before, Vienna, a former imperial capital, and centre of numerous trade routes in Europe, is an entrepôt city, so Austria's PMI is a useful early indicator of the state of the European economy.  The country's PMI fell in March to levels after tentative signs of an upturn.

Euro econ slides again in July

The first real (as opposed to prelim/"flash") PMI we get for Europe is for Austria.  It correlates very well with the pan-Europe PMI, which is what you'd expect given the entrepôt nature of Vienna/Austria's economy.  It's pretty clear that Europe is still slowing.  There were some signs of a dead cat bounce in Europe a couple of months ago, but that's fizzled.  Both PMIs are well below the recession line, i.e., where more than half respondents say that their sales/production/employment/new orders are below last month's.

Still sliding

I've mentioned before how entrepôt economies, such as Hong Kong, Singapore, and Vienna  accurately reflect the economies of their region.   To all intents and purposes, Austria is tantamount to Vienna.  And Austria's PMI fell again in June. 


We have the provisional PMI for the whole of Europe, for June, which had a tiny uptick, and has been flat for a couple of months.  This might suggest that the end to the European slowdown is in sight.  I don't think it is, because monetary policy hasn't shifted and fiscal policy is constrained.  On the other hand, the Euro has fallen against the US$, and that will provide some stimulus, with a delay (that fall has recently stopped). 

The fit between the Austrian and pan-European PMIs isn't exact, but its continued decline is a pointer towards a further slide in Europe's economy.

Entrepôt economy points to recession

I've talked before about entrepôt economies or cities.  They're trading cities which depend on trade in their surrounding regions and around the world.  Cities like Vienna, Hong Kong and Singapore these days and Venice, Dar-es-Salaam in the past.  (I talked about them here and here).  This makes them especially sensitive to economic conditions in the regions they serve.  The PMI (purchasing managers index) for Austria comes out a few days before the final pan-Europe PMI, and correlates well with it.  It fell below 50 for the first time since 2012 this month, which would signal the onset of a recession.  (I explain about diffusion indices and PMIs here)

A recession now in Europe would be difficult to stop.  The ECB's (European Central Bank) discount rate is already at zero, deficit spending is constrained by the "stability pact", and with other large world economies slumping (China, the USA, Japan) it's hard to see what will reverse this downtrend.  As indeed, this article points out.  For obvious reasons, I remain bearish on equities.

Entrepôt regions slowing fast

As you might expect, Austria is strongly correlated with the pan-Europe PMI (purchasing manager indices).  Austria is located in the heart of Europe, and the inheritor of the central role that Vienna played in the Austro-Hungarian empire and in Mittel Europa.  Vienna is a classic entrepôt city like Hong Kong, connecting Germany to Hungary and Slovenia, Czechia to Italy, Germany to Croatia, Slovakia to Switzerland, and so on.  Vienna is just 20 - 40 kilometres from the Czech, Slovak and Hungarian borders.  Actually, even though I knew all this, I was still surprised at how good the correlation was.  Anyway, the advantage of the Austrian PMI is that it is released a few days before the final estimate of the Europe PMI, so it gives us an early guide to the rest of Europe.

Austria is definitely slowing, a sign that its entrepôt trade is slowing and that Europe as a whole is doing likewise.  And the "flash" pan-Europe PMI for August confirms this.

That other famous entrepôt city,  Hong Kong,  is also slowing fast--and in fact has gone negative.  I have followed activity in Hong Kong for decades because as Austria is to Europe, it is to China and more broadly, the world.  Entrepôt cities are sensitive to conditions in their regions.  That both Hong Kong and Austria are weakening is significant.  Hong Kong's slowdown is a clear indication that China has slowed, probably quite abruptly.