Central Europe manufacturing slumps in face of Brexit

Central Europe manufacturing slumps in face of Brexit
Czech and Polish factories recorded a sharp drop in new orders in July.
By Tim Gosling in Prague August 1, 2016

Czech and Polish manufacturing data released on August 1 suggest a sharp slowdown in activity in July as they slumped to multi-year lows.

The Purchasing Managers’ Index (PMI) for the Czech Republic was particularly weak, showing the sector dropped into contraction for the first time in 38 months. Polish factories just managed to keep their heads above water. The figures could be a sign, in contrast to many other indicators, that Brexit poses a palpable risk to the economies in the region, although analysts hope it will prove no more than a blip.

At the same time, the PMIs appear at odds with the activity in the Eurozone, which provides the vast bulk of export demand for Visegrad’s manufacturers. The single currency area PMI was confirmed at 52.0 for July. While that signaled a slight slowdown from June, the index remains comfortably above the 50-point threshold separating contraction from expansion.

“Although signalling an easing in the pace of expansion in July, the PMI points to steady manufacturing growth,” commented Chris Williamson, chief economist at compiler Markit. 

The Czech reading on the other hand dropped into contraction for the first time in 38 months. Previously the clear regional leader as the central bank’s cap on the koruna stimulated exports, the country saw its PMI fall to 49.3. The indicator stood at 51.8 in June.

Of particular concern is the fact that new orders dropped, hinting that the weakness could be prolonged. New export orders fell for the first time since May 2013. Reduced trade volumes with Russia and Slovakia are cited as major factors.

“PMI survey data for July pointed to the worst month for Czech goods producers since March 2013,” noted Samuel Agass, an economist at Markit. “After enjoying an enviable period of growth for the past few years, firms will be hoping that July’s PMI data will be but a minor blip in performance.”

Although Polish manufacturing remained in expansion, it was only just. The country’s PMI fell from 51.8 in June to just 50.3 – the lowest level since September 2014. Again, it was new orders that did most of the damage.

“New exports business fell for the first time in ten months, which was a result of the outcome of the UK referendum,” suggested analysts at Raiffeisen Bank International. “On the other hand output stagnated in July, while employment continues robust growth.”

“Whether jobs growth can be maintained in the coming months depends on whether new work continues to fall, and to what extent,” commented Trevor Balchin, senior economist at Markit.

As is common, Hungary went its own way. The country’s PMI reading jumped to 53.9 points in July from just 50.9 the previous month. The improvement tallies with suggestions that Hungarian manufacturing is set to pick up in the second half of 2016 after an extremely weak start to the year. However, at the same time, the locally compiled Hungarian data is viewed as erratic, and a poor guide to eventual industrial output.

“July’s manufacturing PMIs point to a further slowdown in industrial production growth in Central Europe, to around 2% y/y, which could be an early sign of spillovers from the UK’s Brexit vote,” wrote William Jackson at Capital Economics. “However, we would caution against reading too much into these PMIs as other surveys from last month have been more upbeat.”