Central European factories continue to see activity rebound after several weak months, September’s purchasing manager indices (PMI), released on October 3, show.
The improvement will be welcome, especially in Poland where industrial production and other major indicators have proved weaker than hoped throughout most of the year. The rebound follows early signs of an uplift in the Eurozone and a turnaround in confidence in Germany – the destination for the vast bulk of exports out of the Visegrad states.
“The surveys from… the Czech Republic, Hungary and Poland were particularly encouraging,” notes William Jackson at Capital Economics. “The Polish PMI rose to a six-month high of 52.2 (from 51.5) while the Czech survey reading increased to 52.0 from 50.1. The Hungarian PMI jumped to 57.0 from 51.7, although we would note that this survey tends to be volatile.”
The Polish manufacturing sector continued to regain momentum in September having faltered at the start of the third quarter, compiler Markit notes. Poland’s PMI gained 0.7 point on the back of a faster rate of improvement in manufacturing operating conditions.
The headline figure, however, remains below the average over the current expansionary sequence of 52.6. The growth rates for output and new business picked up to their highest since March, supported by rising exports. Manufacturers also cleared out backlogs of work and stocks of both finished goods and inputs.
Despite the acceleration in activity, employment rose at the slowest rate in over two years. Inflationary pressures remained contained, with input prices rising only fractionally and prices charged for manufactured goods falling.
The PMI result in September might bode well for industrial output data from the real economy. If that is the case, Polish manufacturers could maintain the momentum regained in August, when output rose 7.5% y/y following a disappointing 3.4% in July.
Business conditions in Czech manufacturing also perked up significantly, as the headline PMI index rose to a four-month high of 52 points. The reading was a touch higher than the market consensus of 51.6 and sees the index staying above the 50-point threshold marking expansion for the second straight month. A dip into contraction in July had interrupted a run of 38 straight months of expansion.
The upward trend reflected improvements in all five of the index components. After falling for two consecutive months, new manufacturing orders increased, supported by increasing domestic demand. New export business, on the other hand, remained broadly unchanged as a number of firms reported that weaker German demand had weighed on overall international business, Markit said.
Rising orders helped production grow at the strongest pace since April, while backlogs of work grew at the fastest rate in four months. Employment increased for the 41st consecutive month, with the rate of expansion accelerating to the highest since May. Meanwhile, inflationary pressures intensified, with input prices rising at the strongest pace in over a year.
“The further uptick in the PMI in September suggests the manufacturing sector has stabilised following a poor July performance,” comments Trevor Balchin, senior economist at Markit.
Yet PMI figures so far in 2016 are weaker than both in 2015 and 2014. “IHS Markit is currently forecasting industrial output to rise by 3.1% in 2016, the weakest rate of expansion in three years. Overall economic growth is also set to be the weakest in three years, at 2.5%, before picking up slightly to 2.7% in 2017,” Balchin said, adding that Brexit represents a downside risk to the forecast.
Hungary performed the best of the three, as its PMI reading jumped to 57 points from the 51.3 recorded in August. The reading is the highest result this year, and the third highest reading seen in September since 1995.
While the drop in August was mainly due to summer pauses in production, most businesses restarted production in September. HALPIM – which conducts the Hungarian survey on a slightly different basis than in the rest of Europe, meaning it is not viewed as a reliable guide to activity in the real economy – emphasized in a statement that the country’s PMI has stayed above the 50-mark since the start of the year.
At the same time, the ill-effects of the auto sector’s struggle to stabilize have been evident throughout the year in monthly industrial production data. Output dropped 4.7% y/y in July. While the latest PMI reading offers glimmers of hope that the country’s industrial sector is stabilising, the erratic nature of the survey leads many analysts to doubt it as a guide to eventual manufacturing output.
Last month’s manufacturing PMIs suggest that Russia’s gradual recovery continued at the end of Q3, while growth in Central Europe was relatively strong. “Overall, our weighted-average Central European PMI ticked up to 53.9 from 51.2 which, on past form at least, is consistent with industrial production growth in the region picking up to around 5% y/y in the coming months,” Jackson states.
However, for the financial markets, there’s a lot more to look at than factory output, analysts suggest at Swedish bank SEB. “A small recovery in the PMIs will provide some support the PLN and HUF,” the analysts say. “Nevertheless, investors will be cautious going into Q4, first, before the US ISM [manufacturing] reading… and, second, before US non-farm payrolls on Friday. Concern over Deutsche Bank will also keep a lid on risk appetite.”