Central Europe manufacturing data offer glimmer of hope

By bne IntelliNews February 4, 2013

bne -

Central Europe's struggling economies received a welcome boost on February 1 as data hinted that the region's vital manufacturing sectors may have already hit bottom and are now rebounding.

Although the Purchasing Managers Index (PMI) readings for the Czech Republic (48.3) and Poland (48.6) remained below the 50 mark separating contraction from expansion for the tenth straight month, both came in above their previous three-month readings in the Markit survey. That provides hope the rapid slowdown seen in the final quarter of 2012 could now be winding down.

Hungary will also be happy to see its highest reading since March at 55.9, but analysts remain wary of the survey results coming out of Budapest, which have been erratic throughout the last year or so. PMI data has also enjoyed a tenuous connection to industrial production performance.

The improved readings reflect similar trends in the Eurozone, which saw its PMI rise to 47.9 - the best survey result for 11 months. Central Europe's heavily export-dependent economies will be particularly pleased to see the single-currency bloc following in the footsteps of Germany, which earlier posted a PMI of 49.8. With Germany doominating demand out of Central Europe, the leap seen in its output index into expansionary territory at 51.9 looks a significant boost for confidence.

"While the industrial sector looks likely to have acted as a drag on the Eurozone economy in the final quarter of last year, deepening the double-dip downturn, the PMI provides hope that the first quarter could mark the start of a turnaround," said Markit's Chris Williamson, chief economist at Markit. "Providing there are no further setbacks to the region's debt crisis, these data add to the expectation that the euro zone is on course to return to growth by mid-2013."

"Encouragingly, the new export orders component picked up in both [the Czech Republic and Poland]," point out analysts at Capital Economics, "suggesting that the uptick in the latest leading indicators from key euro-zone exports markets, particularly Germany, is translating into stronger demand."

However, they also caution that Poland managed to record a disastrous 10.6% drop in industrial production in December on a PMI reading just 0.1 lower.

The Czech Republic, whose headline reading picked up from 46.0 in December, will be delighted to see its export-orientated manufacturing sector doing much better at the start of the year. Stuck in recession throughout 2012, with paltry domestic demand the small, open economy's only significant driver is export, which overwhelmingly rely on demand out of the Eurozone.

As RBS points out, as important as the headline figure is the fact that the improvement was seen across the subsectors. "The survey indicates that the improvement was broad based as nine of the eleven sub-indices were up from the previous month," they note. "Impressively, the key component of output had its largest month- on-month increase since mid-2009, while the new export orders index had its largest increase in ten months. With exports accounting for over 75% of GDP, the new export orders index must be tracked closely going forward."

The greatest improvement came in Hungary, where the headline index rose from 48.9 in December to 55.2 in January. RBS notes that he reading has fluctuated above and below the expansion line every month since July 2012. "Perhaps a better indicator of the health of Hungary's manufacturing sector," suggests Capital Economics, "is the EC's industrial confidence survey. This too pointed to an improvement in January, but the rise was smaller than the PMI suggests."

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