Central Europe’s factories remain busy despite a summer lull in PMIs

By bne IntelliNews August 1, 2017

Manufacturers in Central Europe reported a step back in activity and confidence in July, purchasing managers’ indices (PMI) released by IHS Markit on August 1 showed. While, the indicators still suggest manufacturing continues to enjoy strong growth, and will offer significant contributions to economic expansion this year, they also hint at a slowdown at the start of the third quarter.

As so often, the region is following the Eurozone, which is the font of an overwhelming bulk of foreign demand for the small and open economies. The single-currency area saw a slight moderation in the recent strong rate of expansion of its manufacturing sector. The Eurozone PMI dropped 0.8 points from June’s 74-month high to stand at 56.6.

The Eurozone PMI has remained above the 50.0 point threshold separating expansion from contraction for 49 successive months. Germany, in whose supply chain the Visegrad countries play a significant role, saw its PMI sink to a five month low, although as with all the readings, the 58.1 point result still indicates robust activity.

“[W]hile it looks like growth in Central Europe… weakened at the start of Q3, activity remained strong,” sum up analysts at Capital Economics.

Poland’s PMI was exactly in line with the Eurozone indicator, as it also declined 0.8 point in July to stand at 52.3. While the index remains above its historical average of 50.5, the reading indicates “only moderate growth,” IHS Markit notes.

The reading follows a solid performance from the industrial sector in June, when output expanded 6.7% y/y in adjusted terms. In unadjusted terms, however, growth came in at just 4.5% y/y, halving in comparison to the expansion of 9.1% y/y the previous month.

“The latest PMI data present a downside risk to GDP growth, which IHS Markit currently expects to hit 3.7% y/y in 2017,” economist Sam Teague said in a comment. Still, the Polish PMI has now remained above the 50-point threshold for 33 consecutive months now.

“Moderate growth in production, new orders and employment all contributed towards July’s result,” IHS Markit noted. On the price front, rates of input costs eased slightly, while part of the increase in raw materials costs was passed on to customers, with output prices rising solidly. The level of new orders from abroad expanded above that of new orders, signalling that export demand was stronger than demand on the domestic market.

The fall in the index in July appears likely a one off, they suggest at BZWBK, as confidence on future growth prospects remained strongly positive, on the back of optimism towards new technology, increasing demand and rising business investment.

The Czech PMI fell 0.9 points to dip to a year-to-date nadir of 55.3. However, HIS Markit points out that the indicator remains well inside growth territory, meaning conditions in the manufacturing sector continue to improve. The slowdown in that gain was driven by softer - although still solid - rates of growth in output and new orders.

Anecdotally, firms noted that higher production levels were due to greater demand from new and existing clients, the report reads. New orders stemmed from across business lines, increasing for an eleventh consecutive month.

That means the lack of skilled labour remains one of the main concerns for Czech manufacturers. “Employment grew at a strong pace, linked to increased production and new business,” notes IHS Markit’s Sian Jones. “However, firms still reported that labour shortages were restricting growth potential.”

“The latest IHS Markit forecast places industrial production growth for 2017 at 3.9%, up from 2.9% in 2016,” she adds, “with the manufacturing sector highlighted as a key contributor to expansion.”

Hungary's PMI reading showed the sharpest fall, after proving the only one in Visegrad to slow in June. Although it remains at elevated levels, the index dropped a full 2.7 points to 54.2, the Hungarian Association of Logistics, Purchasing and Inventory Management (Halpim) announced. Halpim also lowered the June reading by 0.3 points.

Hungarian manufacturing clearly remains robust, and the index has now signaled expansion for 23 straight months. The July reading did, however, drop below the long term average of 54.6 for the past three years. At the same time, the locally-compiled survey is not seen as a reliable guide to eventual industrial output, and activity continues to show erratic tendancies.

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