Central Europe manufacturing feels the Eurozone heat

By bne IntelliNews December 2, 2011

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The latest figures on Central European manufacturing suggest that the slowdown in the Eurozone is weighing on the region's export-led economies, and even relatively self-sufficient Poland, casting further doubt on growth going into 2012.

Czech manufacturing declined for the first time in two years in November, according to the HSBC Czech Republic Manufacturing PMI gauge. Coming in at 48.6, the HSBC Czech Republic Manufacturing PMI sagged below 50 - the point which indicates expansion in the sector - for the first time since October 2009, the bank revealed in a report released on December 1. That indicates an overall deterioration in business conditions, it added.

Whilst domestic demand has been sluggish in the country for some time, economic growth has been buoyed by high levels of exports, with Germany a key customer for the manufacturing industry. However, with the sovereign debt crisis threatening the entire EU, the big questions are to what extent will the Eurozone's economy slow and to what extent will that hit the likes of the Czech Republic.

To date, third-quarter figures have suggested that the impact has been more muted than feared. However, the HSBC report makes for sober reading, suggesting that the numbers "signal... that business conditions in the

manufacturing sector deteriorated mid-way through the final quarter."

New orders overall to Czech manufacturers decreased for the first time since July 2009, and new export contracts for the first time since August 2009. The bank says the data suggests that "both domestic and export markets weakened," with "demand from American and Western European markets reportedly the key factor."

HSBC economist Agata Urbanska said: "The November PMI reading indicates deteriorating business conditions. The return of the index into contraction territory, for the first time since October 2009, validates downward GDP growth revisions that we have seen in the past couple of months. The Czech Central Bank, Czech Ministry of Finance and the European Commission have all slashed 2012 growth forecasts by more than a half to the 0.7-1.2% range versus the expected close to 2% growth in 2011."

"The sharp weakening of the New Orders index only points to deterioration in output extending further in the coming months when the index fell by more than in the whole January-September period," she adds, "That would suggest the strong exports performance is about to break sharply. While input prices increased in November, output prices fell for the first time since August 2010."

Capital Economics points out that Hungarian manufacturers are also struggling. "The steepest declines came in the Czech Republic and Hungary... driven by a slump in industry in Western Europe, and in Germany in particular. Both countries are relatively small and extremely open. Exports to the Eurozone are equivalent to almost 40% of GDP, and exports to Germany are equivalent to almost 20% of GDP."

The analysts suggest that even more worrying is the fact that Polish manufacturers, which have so far escaped the turmoil in Western Europe remarkably unscathed, now seem to be feeling the squeeze, with November's manufacturing PMI dropped to 49.5 - again on falling export orders - to also leave the index at its lowest level for two years.

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