Central European factories shrug off global threats

Central European factories shrug off global threats
Central European factories stood up well in the face of Eurozone weakness in February.
By Tim Gosling in Prague March 1, 2016

Central European factories shrugged off a 12-month low in the Eurozone purchasing managers' index (PMI) in February to see their own indices rebound, results published on March 1 revealed.

With German confidence showing signs of stress and Eurozone indicators suggesting a sharp slowdown in the recovery, analysts had expected Central Europe's PMI readings to follow suit. However, for the time being at least, Visegrad factories appear to be successfully overcoming the weakness emanating from China and hitting European exporters.

Poland's PMI rebounded from a seven-month low of 50.9 in January to a seven-month high of 52.8. Many analysts had expected the reading would drop closer to the 50-point threshold separating expansion from contraction in the manufacturing sector, on the back of the recent deterioration in German and Eurozone indicators.

Hungary’s reading rose to 54.8 points in February from 53.1 the previous month, the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) reported. The Czech result was the only one of the three to retreat in the second month of 2016, but remains the regional leader at 55.5.

The Eurozone's PMI dropped to a 12-month low of 51.2 in February. The Visegrad region's mostly small and open economies have benefited from recovery in the Eurozone over the past couple of years thanks to deep manufacturing links; the Eurozone's PMI has been in expansionary territory for 32 successive months. However, that heavy dependence also leaves them vulnerable to any slowdown.

"With factory output in the Eurozone showing the smallest rise for a year in February, concerns are growing that the region is facing yet another year of sluggish growth in 2016, or even another downturn," warns Chris Williamson, chief economist at Markit, compiler of the data. 

Yet, for February at least, Central Europe appears to have staved off the effects. The improved factory data comes even despite weak data out of Germany, whose supply chain dominates the order books at many Visegrad factories. German PMI dropped to a 15-month low of 50.5 in February. The return of German inflation to negative territory and renewed weakness in the country's labour market stand as warnings to Central Europe.

However, Capital Economics points out that the weighted average PMI for Central Europe rose to a seven-month high of 53.8, from 52.7 in January. "On past form, the PMIs point to Central European industrial production growth strengthening to around 6-7% y/y over the coming months, from 5% y/y at the end of last year," they add.

Pole vault

As the biggest economy in Visegrad, and one that has thrown up some weak macro indicators so far this year, Poland's PMI rebound is the most noticeable. BZWBK had anticipated a weak reading, suggesting that on top of the problems in the Eurozone "rising uncertainty about the regulatory and political environment is likely to weigh on sentiment".

However, Poland's disappointing industrial output and other data so far this year has been countered by rising confidence indicators amongst both business and consumers. "Headwinds from net-exports and inventories disappeared" in fourth-quarter GDP results that showed the economy expanded 3.9%, point out analysts at Commerzbank.

"The Polish survey was particularly encouraging," writes Capital Economics. "January’s activity data suggested that the economy slowed sharply at the start of the year. But the rise in the PMI in February, coming on the back of the improvement in last month’s Economic Sentiment Indicator, suggests that the weakness of activity in January was a temporary blip."

While the retreat in the Czech PMI to the weakest overall improvement in business conditions since November may be of concern, analysts point out the reading is still above long-run survey averages. They suggest the February decline rather reflects the country's own short-term slip, noting most of the damage was done by pricing sub-indices, and that ongoing business and new orders remain robust.

“Although the Czech PMI eased to a three-month low in February, manufacturing growth in the country remains stronger than that seen in the Eurozone," writes Trevor Balchin, senior economist at Markit. "New orders posted the second-fastest rise in the past seven months and backlogs continued to grow solidly. The latest survey data therefore suggest that the unexpected weakness in official industry output data for December will prove temporary, although the longer term outlook will be closely linked to developments in the wider European and global economies.”

While the locally-compiled Hungarian PMI reading is viewed as erratic and a poor guide to eventual industrial output, it too illustrated what HALPIM calls a brief stagnation in the final month of 2015. Hungarian PMI dropped below the 50-point threshold in December for the first time in 28 months, and at 49.1 the reading was at its lowest in two and a half years.