Forward looking data from Central Europe's vital manufacturing sector continues to paint a blurred picture. Purchasing manager indices (PMI) released on November 2 showed that after lagging for some time, Polish activity pushed to a three-month high last month. However, in the Czech Republic the reading slowed for a third straight month, though sentiment was still more buoyant than its neighbour's.
With the Eurozone's economic recovery stuttering, PMI readings out of the region have proved tricky to read through most of the year. While Czech manufacturing has led throughout, the Polish sector has struggled to maintain momentum. Hungary, usually an outlier thanks to erratic locally-compiled data, has had a strong start to the year fade rapidly.
The continued slowdown in the Czech Republic suggests that conditions in the region are deteriorating. However, the perk up in Poland indicates that German industry - whose supply chain keeps so many Central European plants busy - may be stabilising once more.
Indeed, the rise in the Polish reading to 52.2 in October was largely thanks to the export sector. "Both output and new orders rose at faster rates during the month, with the latter boosted by a recovery in growth of exports," the report notes. The gain moved Poland away from compiler Markit Economic's 50-point threshold between expansion and contraction.
The September reading of 50.9 had seen the country flirting with contraction. However, the weakness was also likely worsened by August's power crisis, with the heatwave-induced restrictions forcing several major plants to halt production lines.
Sentiment indicators out of the single currency region have been "rather encouraging" of late, note analysts at KBC. Better-than-expected inflation and employment estimates last week only helped buoy hopes that the Eurozone may be pushing onto firmer ground.
Inching 0.3 points higher on the month to 52.3, the Eurozone PMI reading showed that export orders made the largest monthly gain for four months. That may help allay fears that weaker growth in China and other emerging markets is derailing the eurozone’s recovery, Markit notes.
While the German PMI reading pulled back 0.2 points on the month to 52.1 in October, Markit points out that "modest manufacturing growth was maintained". That has put the sector in the EU's biggest economy in expansionary territory for 11 straight months, with new business growth quickening.
Handle with care
However, the optimism is diluted by the data from Czech manufacturing, which is significantly more dependent on exports than its Polish peer. While still well above the 50-point threshold at 54, the country's PMI has now dropped for three months straight. The monthly fall was 1.5 points.
Just to confirm the confusion, in contrast to Poland, slowing exports growth helped capped the expansion of new business at it slowest rate in two years.
"The Czech manufacturing sector continued to lose momentum in October," says Markit's chief economist Trevor Balchin. "The PMI has fallen by 3.5 points since July, the biggest combined drop since the 4.5 point fall seen over March-May 2012."
Analysts appear confused over just how full is the glass. Balchin insists the data "signal that the official [industrial production] growth rate will ease below 5% [year on year] in the coming months," and that November's PMI reading is likely to show the slowdown continuing.
At Capital Economics, on the other hand, Liza Ermolenko is clearly less concerned. "The PMI still stood at 54.0, which is consistent with solid growth in industrial output of around 6% y/y," she asserts.
Neither is the uncertainty exclusively focussed on Prague. While noting the improvement in Poland, analysts also note that the country's factories had a further decline in backlogs, pointing to slowdown in investment in the fourth quarter.
At 52.3, the Eurozone PMI edged higher from September’s five-month low of 52.0. However, the rate of expansion signalled at the start of the fourth quarter was still in line with the tepid growth seen in July-September. Markit's chief economist Chris Williamson calls it "a lacklustre performance given the amount of central bank stimulus in place".
Regarding German factories meanwhile, the report notes that inventories are rising. "It is too early to say whether German manufacturing is in the midst of a slowdown or if October’s survey results present just a temporary soft patch,” suggests Oliver Kolodseike, economist at Markit.
In line with the naysayers, the PMI reading in Hungary edged down once again, dropping to 55.3, from the 55.8 recorded in September. The new orders index showed a slight decrease, and output dropped compared with the previous month. However, the reading - compiled by the Hungarian Association of Logistics, Purchasing and Inventory Management - is regarded as less reliable as a guide for industrial production.
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