Central Europe’s factories stumbled in April, according to Purchasing Manager’s Indices (PMI) released on May 2. The pullback came despite recent data suggesting greater stability in the Eurozone recovery.
Data out of the Eurozone has been offering increased optimism for Central Europe’s economies – which are so heavily dependent on export demand out of the single-currency area – compared with the worrying signs early in 2016. However, while the recovery now looks more stable, progress remains slow.
At 0.6% q/q, first quarter GDP growth in the Eurozone was the fastest pace of expansion in the last 12 months, and finally pushed GDP above its pre-crisis level. Hand-in-hand, confidence is rising also. The Eurozone Economic Sentiment Indicator expanded 0.9 points in April, with the advance of the German index “suggesting Europe’s largest exporting economy has weathered the external slowdown,” points out Oxford Economics.
The gains have increased optimism. “Drawing on the positive surprise regarding GDP for 1Q16 and the increased ESI survey results in April, for 2Q16, we expect a stabilisation of the Euro area growth at 1.5% to 1.6% y/y,” write analysts at Erste. “However, the upward risks to our forecast have increased.” Yet despite the more positive signs, weak sentiment on global markets remains.
On the other hand, the recent lfo business confidence survey was disappointing, illustrating the uncertainty in Germany, which provides a huge chunk of export demand for Central Europe’s factories. Both the German (51.8) and wider Eurozone (51.7) PMI’s recorded three-month highs in April.
“Growth in Germany showed signs of reviving after a recent bout of near-stagnation,” points out Chris Williamson, Chief Economist at Markit, which compiles the survey.
However, both the Eurozone and German PMIs remain only marginally above the 50-point threshold signaling expansion of the manufacturing sector, and were also among the weakest registered over the past year.
“The survey data therefore so far show no signs of ECB stimulus or the weaker euro helping to revive the manufacturing sector, at least for the euro area as a whole,” Williamson continues. “Hopes are therefore pinned on recent signs of increased bank lending and more aggressive quantitative easing providing the much needed boost.”
At a low
Factories in the Czech Republic and Poland will certainly be eager to see the European Central Bank’s stimuli providing some momentum, as their PMIs fell to multi-month lows. Of particular concern will be a sharp drop in new orders.
The Czech PMI reading hit a 16-month low, making concrete the recent slowdown. The April reading declined 0.7 points on the month to 53.6. The result was a huge disappointment following over a year of readings pointing to strong expansion for the country’s vital manufacturing sector, which provides a massive chunk of GDP via exports.
“The first batch of PMI data for the second quarter provides further evidence that growth of the Czech manufacturing sector has moderated since the start of the year,” comments Trevor Balchin, senior economist at Markit. “Weak export demand, linked to a subdued German manufacturing economy, has weighed on overall new business growth.”
The current sequence of growth in the sector now runs to three years, but April’s result was the weakest of any month. Analysts had expected the PMI at 54.3.
“Although conditions in industry remain favourable, [the PMI reading] showed decline for the fourth consecutive month,” note analysts at KBC. “The most worrying [sign] probably was the tepid pace of growth of new orders. On the other hand, demand for new workers remains strong, which is a good sign from the perspective of the central bank, which expects relatively fast wage growth.”
The decline was even more extreme in Poland, as April’s PMI fell a full 2.8 points to 51.0 – putting it below the Eurozone result. While Polish manufacturing has now been expanding for 19 months straight, the monthly drop was the second-largest since November 2008, and represents “a marked loss of growth momentum at the start of the second quarter", Markit reports.
Analysts had expected some slowdown, but were still looking for a reading of around 53-53.5. Again, new orders put in a worrying performance, while in contrast to the Czech Republic, the output and employment indices also slowed sharply. That suggests a swift recovery is unlikely.
“The Polish manufacturing sector lost all the momentum gained since January at the start of Q2,” Balchin writes. “Though still above 50.0, the PMI posted its second steepest one-month fall since the global financial crisis in late-2008. This took the headline figure below that seen for the eurozone (based on the April flash reading of 51.5). Moreover, a marginal rise in new orders suggests that overall conditions in the sector will remain subdued in May.”
As ever, the locally compiled Hungarian PMI went its own way. Showing the erratic nature that leads many analysts to doubt it as a guide to eventual manufacturing output, the index rose 0.5 points in April to finish at 52.2, the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) reported.
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