Central Europe's factories on two-track tangent

By bne IntelliNews September 1, 2015

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Central European Purchasing Managers' Indices (PMI) for August showed factory activity diverging. While the Czech Republic continues to speed along in the fast lane, Hungary is making slow progress, and Poland seems to be at a crossroads.

Poland's PMI reading took a tumble, according to data released by Markit on September 1, falling to 51.1 from 54.5 in July, although it remained above the no-change mark of 50.0 for the 11th successive month. Weaker new export orders did a lot of the damage.

The drop was clearly driven, at least partially, by the heatwave-induced power limits imposed in the middle of August. But at the same time, Trevor Balchin, senior economist at Markit, notes that the "data for July and August suggest that manufacturing could weigh more heavily on economic growth in the third quarter".

Erste Bank notes that Poland's PMI came in well below expectations of a reading of 54.2, and warns that the sharp slide could provoke some "nervousness on the markets". It will also do little to dampen the rising political risk in the country, with the ruling Civic Platform badly lagging the populist Law & Justice in the polls.

Yet others appear less concerned. The reading "runs contrary to the picture painted by last month's [European Commission] industrial sentiment indicator, which rose to a seven-month high," points out William Jackson of Capital Economics.

Czech factories continue to motor onwards. While falling from July's 51-month record of 57.5 to a three-month low of 56.6 in August, the country's PMI "still signals sharp overall improvement in business conditions," Markit remarks. Data for the first two months of the third quarter signal the strongest quarterly performance in over four years.

That has the Czechs leading the region, as they have for much of the past 18 months. Mixed with a continued lack of inflationary pressure in Central Europe, the result will likely only support the central bank in its tussle with investors and select political figures over its cap on the koruna, which has now been in place for close to two years. Czech PMI has remained in expansionary territory since May 2013.

Hungary, by way of contrast, continued to lag in August. Although the index climbed 0.8 points to 50.7 to escape the contraction it fell into in July, the data from the Hungarian Association of Logistics, Purchasing and Inventory Management only strengthens doubt over the direction of the economy.

On the one hand, the locally-compiled indicator is not seen as a reliable guide to actual industrial production, and tends to be erratic. However, its recent hints that the economy is slowing down are gathering support. Second-quarter growth of 2.7% was a disappointment, and recent data on investment and lending show the state remains largely alone in the driving seat, albeit retail sales are still showing strong growth.

With the central bank having only a little dry powder, with rates at a record low 1.35%, analysts are starting to predict that economic expansion will continue to slow over the medium term.  

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