Central European manufacturing's purchasing manager indices (PMI), which have presented a consistent picture of recovery for well over a year, turned more mixed in January.
Jitters over emerging markets, added to the already sluggish recovery in the Eurozone, appeared to knock some of the region's factories out of their stride at the start of 2016.
The big disappointment came in Poland, where the PMI dropped 1.2 points to 50.9 in January, to record its lowest reading in 16 months. While Visegrad's largest economy remained above the 50-point threshold demarcating expansion from contraction in the index, it was only just, as a constant flow of political controversies apparently increased its vulnerability to global pressures.
By way of contrast, the Czech Republic – which has led regional PMI's for most of the more than two years that the central bank has maintained a cap on the koruna – enjoyed a gain in its reading yet again. The index pushed 1.3 points higher to 56.9 in the first month of the year. Hungary also joined the gainers, although that country's erratic PMI data is viewed as far less reliable than that of its peers.
The data produced some debate amongst analysts as to which reading – that of Poland or the Czech Republic – is more indicative of the likely trend going forwards. Many looked for optimistic signs, even in the face of a pull back in the wider Eurozone PMI reading. That's a crucial factor for Central Europe, which relies heavily on trade ties with the single-currency area, and especially its role in the German supply chain.
The Polish reading "may understate the strength of the Polish economy," suggests Capital Economics. "It’s unusual for the Polish survey to move in the opposite direction to the Czech and Hungarian indices. After all, their manufacturing sectors are broadly similar, and depend heavily on demand from Germany. What’s more, the [European Commission's] manufacturing confidence index for January (published last week) – which has had a better relationship with the hard manufacturing data in recent months – strengthened."
However, Markit's senior economist Trevor Balchin points out that forward looking sub-indices suggest Polish manufacturing may continue to slow, in the short term at least. "New business growth lost further momentum in the latest period, dragging the [Polish] PMI to the joint-weakest level in the current 16-month upturn." At the same time, the long-term outlook remains positive, he notes.
The pull back was "stronger than expected," add analysts at BZWBK.. However, they also fret that "the downward move was due to a slide in new orders and output … this is not positive news, suggesting a possible slowdown in Q1."
Indeed, there is concern that the political controversy surrounding the recently-appointed Law & Justice government, and the effect of its policies on the banks and fiscal management, could hit confidence as the new year starts, overcoming the strong finish to 2015, with growth in the final quarter thought to have pushed close to 4%. Analysts at RBI include S&P's surprise downgrade of the sovereign as among likely factors for the weaker PMI in January.
The speed bumps at home look to have increased Poland's vulnerability to the deterioration in sentiment in the Eurozone. It may be especially worth noting that data released on January 29 showed the net contribution of exports to Polish growth in the fourth quarter turned negative, shaving overall GDP growth by about 0.4pp.
In line with an earlier flash estimate, the single-currency area's PMI dropped to 52.3 in January from 53.2 the previous month, with new orders stagnant. Germany's slump to 52.3 was a three-month low.
"The Eurozone's manufacturing economy missed a beat at the start of the year," rued Chris Williamson, chief economist at Markit. "The survey data signal an annual rate of growth of manufacturing output of just 1.5% at the start of the year."
Freed from significant domestic disturbances, the Czech index powered onwards, despite the economy's reliance on export demand out of the Eurozone far exceeding that of Poland's. The median market estimate was for a drop of PMI to 55.0 in the Czech Republic.
The rise surprised analysts somewhat. "Even though the Czech business sentiment has been continuously improving over the last couple of months, and in January reached very high levels, sentiment in the biggest Czech trading partner (Germany) slightly decreased in January," RBI notes. Turbulance on the financial markets might also have been expected to contribute to a decrease in PMI, the analysts add.
Hungary shared in the gains. However, the locally-compiled index is viewed as erratic, and far from a reliable guide to eventual industrial output.
The country's PMI returned to positive territory as it rose to 53.0 in January, after it broke a 28-month expansion streak in December to drop into contraction at 49.9, the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) reported.
The compiler claims the poor December reading was connected with holidays and production cycles in the final month of 2015.