Business conditions at Central European factories mounted something of a recovery in August following a jarring drop in purchasing manager indices the previous month. However, the return to expansion looks anything but solid.
Business conditions in Czech manufacturing improved in August, with the headline PMI index returning to growth after posting its first contraction in a full 38 months the previous month.
On the one hand the swift return appears to support assertions that the contraction was a blip. “The CNB governor Rusnok labelled PMI decline in July as an outlier and we also agree with this opinion,” wrote Daniela Milucka at Raiffeisen Bank International ahead of the August data. However, the sector only just kept its head above the 50-point threshold marking expansion last month, as the index rose to 50.1 points from 49.3 in July.
That is well below the consensus forecast of a rebound to 50.9. Adding to such disappointment, while the tentative recovery reflects rising output and employment sub-indices, those gains had to offset with yet another decline in new orders.
Output growth declined for the first time in over three years in July, so its return is a huge relief. Yet the rate of expansion was only marginal and well below the long-run trend level since the survey started in June 2001, complier Markit said.
New orders fell for the second month running, mainly on the back of weaker export demand. Employment increased for the 40th consecutive month, but the rate of expansion was the weakest since June 2013. Meanwhile inflationary pressures remained weak, with both input and output prices rising at a modest pace.
“The recovery in the Czech PMI in August was encouraging, but the latest figure merely signalled an overall stabilisation in conditions as opposed to an outright improvement,” comments Trevor Balchin, senior economist at Markit. “IHS Markit currently forecasts Czech industrial production to rise by 3.8% in 2016 and overall economic growth to ease to 2.5%, though there are clearly downside risks such as the uncertainty generated by Brexit and any reprise of the euro debt crisis.”
The lukewarm return to form in the Czech Republic left Poland to do the running. The country just managed to stave off a fall into contraction in July, and in August took a rare lead in the Visegrad region as its PMI reading gained to 51.5.
A robust combination of positive factors pushed the recovery, Markit notes. At odds with the precarious Czech data, the Polish expansion owes mainly to an increase in new orders driven by export demand. The same momentum saw a resumption in output growth.
Employment in the sector continued to rise at a fast pace, and purchasing activity increased for the first time since May, Markit also notes. Meanwhile, cost pressures weakened, despite reports of higher metal prices. Manufacturing output prices fell for the third consecutive month, as firms reported competitive pressures.
“The reading fits our expectations regarding a clearer increase in the pace of economic growth in the second half of the year,” state-owned bank BGK comments. “We were expecting a rebound, as July’s reading was a pessimistic one-off,” they claim at BZWBK. “However, the upward move proved stronger than we expected … Solid data on export orders suggest that export may remain the key driver of Polish economic growth in Q3.”
Yet other analysts are less convinced of the strength of the recovery. “While the Central European PMIs strengthened last month, overall they point to weaker growth in the region than in the first half of the year,” suggests William Jackson at Capital Economics. “On past form, the Central European PMIs are consistent with industrial production growth of around 2-3% y/y in the coming months, down from 4% y/y in the second quarter of this year.”
Hungary’s PMI came in at 51.3 in August, 2.6 points lower than in the previous month. The reading is the second lowest result this year, but the indicator remains in expansionary territory.
HALPIM - which conducts the Hungarian survey on a slightly different basis than in the rest of Europe – blamed the fall on summer pauses in production at many companies. However, on top of a decrease in production, the new orders index also fell, suggesting the weakness could persist.
While an extended turn of the year slowdown in Hungarian industry contributed to feeble GDP growth in the first three months of 2016, the annual increase in Hungary’s industrial output in the second quarter helped push GDP growth to a 2.6% annual increase. In June, however, output dropped again (by 0.3%), mainly due to the auto sector's struggle to stabilize.
A decline in August’s PMI only deepens concern over the long-term recovery of Hungarian industry. At the same time, the erratic nature of the locally-compiled survey leads many analysts to doubt it as a reliable guide to eventual manufacturing output.