Tim Gosling in Prague -
Central Europe hit a bump in the road in leading the European economic recovery, with May manufacturing data showing wide variation within the region. While the Czech manufacturing continued in leaps and bounds in May, the Poles saw a sharp and surprising slump in activity. Russia and Turkey continue to lag even further behind.
The latest purchasing managers' indices (PMI) for both the Eurozone and the closely linked Central European economies has many scratching their heads trying to pin down where the recovery from the crisis stands.
The single currency area saw its recovery momentum continue to slow, as it registered a reading of 52.2. Although that remains above the crucial 50-mark that indicates expansion in manufacturing, it's the lowest reading for six months, and took another step down following April's 53.4 reading.
Another deceleration in Germany - which fell to a seven-month low of 52.3 - is also worrying for the regional economies that are so reliant on their role in its supply chain. Following a disappointing result in April, Poland promptly saw its PMI collapse to its lowest level in 11 months, which might make more sense if the Czech Republic hadn't continued to thrive.
From a peak of 55.9 in February, Poland's PMI lost ground in April to 52.0, to end up just above the threshold at 50.8 in May. Lower activity in Germany would help explain why the Polish manufacturing sector has apparently slowed sharply in the second quarter of the year, except the Czechs - whose exposure to German manufacturing is significantly higher than Poland's - saw their PMI jump from 56.5 in April to 57.3 - three-year highs both.
The usual suspects?
The obvious suspect would appear to be the Ukraine crisis. Polish trade with Ukraine and Russia is far higher as a percentage of GDP than any other country in Central Europe. Analysts at Standard Bank call the low reading a "surprise" given the recent upbeat forecasts from the government and economists "of growth accelerating to 3-3.5% this year on the back of strong export performance to Europe, plus evidence of a pick up in domestic demand."
By way of contrast, Capital Economics can only suggest that Polish PMI readings are losing their accuracy, insisting that other data - such as a pick-up in industrial output in April despite the PMI drop and high confidence in surveys - paint a rosier picture. "While we’re not dismissing the possibility that the Ukraine crisis has affected Poland," they write, "the PMI survey probably paints an overly downbeat picture of the state of the economy."
Yet the impact of dropping demand for exports out of Ukraine and Russia on Poland appears the one palpable shift since it was barreling along at the head of the recovery in February. It's also the one palpable difference with the Czechs. The Hungarians, as ever, offer little help in deducing the true picture, with their PMI compiled locally and seen as highly unreliable for forecasting actual activity. Hungary's PMI fell to 53.9 in May after rising to 54.6 the previous month.
Analysts at Commerzbank are equally noncommittal. Planted firmly on the fence, they say "Eurozone and Ukraine dynamics" are probably behind the weak Polish reading, but maintain that the "real data should continue to highlight [that Central Europe is] on a gradual recovery path."
Elsewhere in Central and and Eastern, Russia's PMI rounded out a less depressing month in May, which has seen markets perk up a little on hope that the Ukraine crisis could be headed towards some kind of end game. Still, with worries of recession and huge capital flight continuing to overshadow, Russia's PMI reading remained in contraction territory, albeit it rose to 48.9 from 48.5 in April to give the country its highest reading in six months. "While this is encouraging, it’s still extremely low by historic standards," according to Capital Economics.
Another recent struggler, Turkey, headed in the other direction, with its PMI falling to 50.1, its lowest level in almost a year. With the country beset by political risk, which in turn does little to help with efforts to reform the economy, the details offer no solace for the near term. "The sharp fall in the new export orders component suggests that the rebalancing of the economy may not be progressing as smoothly as some now seem to think," the same analysts suggest.
The seemingly contradictory PMI readings will hardly be welcomed by central bankers. While domestic demand in the Czech Republic has been on the floor throughout the crisis, it started picking up somewhat this year, but exports remain in the driving seat. That has invariably been helped by the central bank's intervention launched last year to quash the value of the crown apparently working well. Agata Urbanska-Giner at HSBC, which co-publishes the Czech PMI reading, suggests that on the back of new orders and inventories more is to come.
Such accommodative monetary policy is unlikely to change anytime soon, given that inflation is still scraping the floor across the region. The Czech National Bank is clearly set to keep intervention in place until at least the end of the year. However, others have decisions to make.
The signs that the recovery is slowing in the Eurozone - in particular in the German powerhouse - and Poland will add to the pressure on rate setters in Frankfurt and Warsaw ahead of meetings this week. “Taken together, the PMI surveys are pointing to a second-quarter GDP increase of about 0.5%,” noted Chris Williamson at Markit.
The European Central Bank meets on June 5, with many calling for further unconventional policy moves. However, others suggest it would be unwise to expect the recovery to remain "inflationless" and urge caution. Commerzbank worries that emerging markets will suffer whatever the decision, given that investors have priced a dovish ECB into their positions on local currencies. "We could see any ECB decision upset EM, exactly twelve months after Mr Bernanke’s tapering talk hit EM assets," they suggest, referring to the announcement of the reduction of quantitative easing by the US Federal Reserve.
The instinctively hawkish National Bank of Poland is also due to meet this week, with the expectation being that it will remain on hold at 2.5%. The sharp drop in the PMI reading will likely see more hints that low rates are set to be extended. Previous suggestions that a rate hike could come later this year have seen the zloty rise, doing little for exports.
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