Nicholas Watson in Prague -
June's industrial production numbers for Hungary and the Czech Republic both point to a weakening of the forces, mainly German demand, that have been driving the export-led recovery in Emerging Europe. This slowing growth is likely to become more apparent when July's data is released in September, as indicated by July's weak manufacturing PMI data that was published in early August.
"We expect the year-on-year industrial production growth rates to moderate in all of these countries as the euro area debt crisis and the slowing in activity in the US economy begin to slow the growth in exports from these areas," says Don Egginton of Daiwa Capital Markets Europe.
Indeed, on August 5 data showed that German industrial output fell a seasonally adjusted 1.1% in June from May, alongside falls in Italy and Spain. These weak numbers are consistent with the other evidence that the Eurozone economy is slowing, which in turn is hurting the exporters in Emerging Europe.
On August 8, the Czech stats office said annual growth in industrial production decelerated to 7.4% in June, while it actually declined 1.9% from May, when year-on-year growth came in at a huge 15.2%. "In accordance with the situation in Germany, the Czech Republic's biggest trade partner, the second quarter was weaker than the first," says Jan Vejmelek of Komercni Banka. "The risks for the future lie clearly in external demand development. Domestic demand cannot be relied on, as new domestic industrial orders even declined in June (down 5.2% on year). Foreign orders are rising so far (up 11.8% on year), although the situation in the global economy is becoming more and more blurry."
Hungary also reported very disappointing industrial production numbers for June, with a 0.6% contraction in output on month and up just 1.0% on year. "Our previous outlook for this year's 8.5% growth in the industry seems too optimistic after this release," says Zoltan Arokszallasi of Erste Bank. "[This] increases the risk that second-quarter GDP may be closer to 2.0% than to 2.5%."
Purchasing managers indices - which are based on private business surveys and so regarded as leading indicators of the overall situation in manufacturing - released earlier in August suggest this trend is going to pick up. Manufacturing PMIs for July fell in three of the four countries in the region that have reported such data.
Russia showed the sharpest fall, with its PMI falling below the 50 mark - the point that in theory at least separates expansion from contraction - for the first time since December 2009. Elsewhere, the Czech Republic dropped to 53.4 (from 55.1 in June) and Turkey dropped marginally to 52.2. "Surveys in Turkey suggest that domestic and external orders are getting weaker, leading to a slowdown in industrial production," says Ozlem Derici of Erste Securities in Istanbul. "Industrial production growth is likely to further decline to low single-digit growth by the last quarter of the year."
In Slovakia, sentiment in industry has deteriorated quite substantially since June. "We expect Slovak industrial production to decline in June by some 1.5% on month. That would translate into a slowdown of annual production growth to around 6%, from the 10.7% year on year seen in May," says Maria Valachyova of Slovenska Sporitelna.
This leaves Poland as the only country in the region to report a rise in the PMI in July, rising to 52.9, albeit from an 18-month low of 51.2 in June.
"A regional PMI - obtained by weighting together individual country PMIs by the size of their respective manufacturing sectors - suggests that, while industry is still growing on a month-on-month basis, the pace of growth has slowed to a crawl over the past quarter," says Neil Shearing, senior emerging markets economist for Capital Economics.
The overall impact of this on the various economies will of course depend on how much domestic demand can offset the fall in external demand. Turkey and Poland both have large domestic markets that should ensure industry doesn't collapse, though economists are more concerned about the potential impact of a slowdown in the Eurozone on Hungary and the Czech Republic, where domestic demand remains weak and exports have been the key driver of recent growth.
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