Tim Gosling in Prague -
Central European manufacturing on August 1 offered its strongest support yet to the recovery story in the region, as Purchasing Managers Index (PMI) surveys showed continued expansion in the Czech Republic and a strong rebound in Poland last month on the back of improved conditions in the Eurozone. However, the larger Central and Eastern European economies are now starting to struggle.
While the data suggests Central Europe's export-dependent economies are benefitting from improved activity in the Eurozone, renewed downturns were seen in CEE's largest economies, Russia and Turkey, which are far more dependent on domestic demand. The results suggest a turn of the tables across the region, with the Central European laggards improving while the two eastern economies, which have outperformed through the last year or more, find themselves caught up by the crisis.
The Czech Republic, struggling to escape from its longest ever recession, saw its manufacturing sector in expansion mode for the fourth month in a row, recording a 16-month high of 52.0 in July. Poland, itself a late comer to the downturn as its previously bullish domestic demand finally ran out of steam, saw its manufacturing sector move out of contraction for the first time since March 2012, rising to 51.1 from 49.3 in June.
While Hungary saw its manufacturing sector dive back below the 50-point threshold separating contraction from expansion at 49, there was a silver lining, with the export sector figure rising. At the same time, the data from Budapest - compiled under different parameters - is often volatile and rarely seen as having a strong connection to actual industrial production.
Still, "Hungary's central bank will likely use [the] poor PMI outturn as another reason to ease monetary conditions further," suggest analysts at RBS.
By way of contrast, the Polish central bank is forecast to maintain its stance that the easing cycle is at an end, while the Czech National Bank on August 1 again deferred from intervention to weaken the crown - albeit, it attempted once more to offer verbal intervention by suggesting the step may now be nearer.
"The [Czech] manufacturing PMI index stood above the 50 points threshold for the third consecutive month in July and shows that growth is gaining momentum," Agata Urbanska, an economist for HSBC - which compiled the Central European reports alongside Markit - suggests. The reading is just below the country's long-term average index of 52.3, she notes, while adding that the "the [Polish] month-on-month uptick in the headline figure was the second-largest in 44 months."
The key, as ever for Central Europe, was the continued recovery in the Eurozone. Exports to the single currency region constitute a huge bulk of the economies in the Czech Republic and Hungary, and have increased their role in Poland over the last 12 months. New export orders did most of the leg work in buoying the July PMI data.
The Eurozone's PMI reading of 50.3 in July saw its manufacturing sector back in growth for the first time in two years. "This hopefully places the sector nicely to provide a positive spur to the third-quarter GDP numbers and help the euro area exit recession," says Rob Dobson, senior economist at Markit.
However, analysts caution that progress will likely be slow. "Given our below-consensus forecasts for growth in the euro area, we doubt that the CEE economies are about to take off," say analysts at Capital Economics. "But growth in the second half of this year should at least be stronger than in the first half."
Less positive for CEE, however, were the numbers out of the region's largest economies.
Russia's manufacturing sector moved into contraction for the first time since September 2011. At 49.2, the headline PMI outturn declined from 51.7 in June, and was the lowest reading since December 2009. With the ratio of new orders to inventories building, analysts suggest weakening domestic demand was the main reason behind the poor reading.
Tim Ash at Standard Bank suggests the disappointing data "underlines the flurry of activity now in Russian policy circles, with big pump priming spending programmes now being rolled out ASAP. Efforts to ease monetary policy, and... a weaker rouble has to be part of the response."
Turkey, already under pressure on financial markets due to political unrest and renewed worries over its huge current account deficit, moved back into contractionary territory at 49.8, after ten consecutive months of expansion. Even more worrying for Ankara will be the fact that it was dropping export orders that did the damage - trade balance data for June released on July 31 indicated a 6% year-on-year contraction in exports. With that current account deficit in mind, the government would likely have welcome a similar scenario to Russia and a pullback in domestic demand.
"Weakening exports and declining confidence support our view that growth will disappoint on the downside this year, and will miss the 4% target," RBS analysts fret. "Although the central bank has looked to support growth this year ahead of elections, we think that the level of the lira is now the key determinant of monetary policy, following the recent sell-off. We therefore still anticipate a hike in the upper end of the interest rate corridor, the lending rate, by 75bps at the next MPC meeting as the currency remains under pressure."
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