Central Europe's factories robust as Eurozone PMI ends 2015 on a high

By bne IntelliNews January 4, 2016

Despite a sharp drop in the erratic Hungarian reading, purchasing manager's indices (PMI) released by Markit on January 4 suggest recovery in Central Europe's manufacturing sector remains firmly on track.

Growth at Czech and Polish factories continues to be robust, the forward-looking surveys hint, pulled along by the steady recovery in the Eurozone. The readings for the last month of 2015 offer more evidence that the Visegrad region remains resilient to the challenges posed by the slowdown in emerging markets and the Volkswagen emissions scandal thanks to demand out of the single currency bloc.

Rising 0.4 points on the month to 53.2 in December, the Eurozone's manufacturing PMI rose to its highest level since April 2014, to end the year on a high. The reading has now remained above the 50-point threshold separating contraction and expansion for 30 straight months.

The result leaves the Eurozone's average PMI reading for the final quarter of the year at 52.8 - the best since the first quarter of 2014. The PMI average of 52.2 across 2015 is the best since 2011.

"Accelerated growth in Germany ... added welcome buoyancy [in December]," , notes Rob Dobson, senior economist at Markit. Headline PMI in the EU's biggest economy rose to a four-month high of 53.2. That will be particularly welcome news in Central Europe, where a huge chunk of GDP is linked to the German supply chain.

Reflecting the relationship, Central European factories have also been in expansionary territory for some time, minus the odd dip in Hungary, where the locally-compiled PMI survey is seen as erratic and a less reliable guide to eventual industrial output. Indeed, Hungarian PMI dropped below the 50-point threshold in December for the first time in 28 months, and at 49.1 the reading comes in at its lowest in two and a half years.

The apparent fall of manufacturing into contraction from a healthy 55.8 the previous month would be a concern elsewhere, but the survey released by the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) is not seen as a reliable guide to eventual factory output. HALPIM blamed the disappointing result on the regular year-end slowdown and scheduled production halts.

More worryingly for the Hungarian economy, however, the output and new orders sub-indices sank to new multi-year lows. On the upside, the exports indicator continued to show an expansion.

Solidly unspectacular

At the other end of the scale, the Czech PMI reading suggests continued strong expansion as it rose to 55.6 from 54.2 the previous month. The index was in positive territory for the 32nd month, and is "indicative of the fastest growth in the sector since August", Markit notes.

Manufacturing new orders rose at the strongest rate in four months in December. That followed the slowest gain since June 2013 in the previous month. Data signalled stronger demand from both domestic and export markets. New export business growth hit a five-month high, with a number of companies reporting new orders from the Russian market.

That said, even the region-leading Czech manufacturing sector – buoyed by the central bank's cap on the koruna – is stalked by some uncertainties. The country's PMI average of 54.6 over the fourth quarter was the weakest quarterly trend for a year.

It's a similar story to the north. Remaining solid at 52.1 for a second month, Poland's PMI has now sat in expansionary territory for 15 months, but is clearly struggling to keep pace with its southern neighbour.

The result earned praise from many, who were relieved to see Poland's manufacturers on a steady footing after a few erratic months. "These data signal solid, steady growth [for Poland's factories]," , suggest analysts at BZWBK. "The main positives were stronger growth of output and employment," notes Trevor Balchin, senior economist at Markit.

Others, however, pointed out that some details are a cause of concern, in particular the guidance offered by the new orders index and its ramifications for the wider economy. The index rose at its slowest pace for three months.

"New order growth disappointed," Balchin concedes, admitting that the weakness "rais[es] a question mark over the performance of the sector at the start of 2016."

"Domestic demand is at fault," according to analysts at Credit Agricole, who point out that export orders came in at a five-month high. Of the Central European economies, Poland is the least reliant on exports, with domestic demand playing a much larger role in growth.

Still, the wider picture suggests Visegrad factories are enjoying the lift offered by the Eurozone. "In Central Europe, our weighted PMI (which includes the Czech Republic, Hungary and Poland) edged down, to 52.5 from 52.3," note analysts at Capital Economics, while pointing out the culpability of Hungary's "volatile" reading. "On the basis of past form, this points to industrial production growth in the region slowing to a little below 5% y/y over the coming months."

At Markit, Dobson hints the single currency area has more to offer should it stay on track, albeit, the momentum is unlikely to be rapid. "While there is much to be positive about in these figures, the underlying picture is still one of solid yet unspectacular expansion," he writes. "With Eurozone manufacturing still some 9% off its pre-crisis peak, it looks as if the sector still has some distance to travel before the climb back to full recovery is completed."

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