Purchasing manager indices in Central Europe dropped across the board in June, data released on July 1 showed. The surveys of factory activity point to a continued slowdown of economic growth in the region in the second quarter, following a weak first three months of the year. Meanwhile, Brexit will clearly provide an additional hit to confidence at the start of the second half of the yeaer.
The PMI's dropped in Czechia, Hungary and Poland last month to leave Capital Economics' weighted average for the region at its lowest since September 2014 as it edged down to 51.6 from 52.4 in May. While all readings remain above the 50-point threshold separating expansion from contraction, it was only just in some cases. It is notable, meanwhile, that the surveys will have been taken before the shock of the Brexit vote.
That is a worry for the region, which already saw a sharp slowdown in economic growth in the first quarter. While a large pullback in EU funding due as the new budgetary window comes into play was largely to blame, sagging industrial output – especially in Hungary – also contributed. More specifically for June, the weak readings are somewhat surprising given recent improvements in confidence and PMI in Germany, the leading source of export demand in the region.
Poland’s PMI has been showing signs of vulnerability for some months, and fell 0.3 point to 51.8 in June. The reading was short of market expectations of an increase to 51.6, and clearly signals further moderation of activity in the manufacturing sector.
However, at the same time the Polish PMI reading has now been in expansion for 21 straight months. On top of that, four of the index's five components were positive in June. “The structure of the data shows a positive picture, with most components improving," insisted analysts at BGK. "Production is accelerating, even if slowly, as are new orders and employment."
However, the trend is clearly for a pullback, as it is in the Czech Republic, which saw its PMI reading drop for the fifth straight month. Matching the Polish result at 51.8, Czech activity ducked from 53.3 in May to its lowest level in a full three years in June. The reading is also is below the long-term average of 52.9, Markit notes.
The downward trend was reflected in all five of the Czech index's components. “Survey indicators for output, new orders, exports, jobs and purchasing all showed weaker rates of expansion. The output index is consistent with a stagnation in the official year-on-year measure of industrial production,” Trevor Balchin, senior economist at Markit said.
Manufacturing new orders increased for the 37 straight months in June, but at their weakest pace since November, reflecting soft demand from export markets. Growth in output was the slowest in over three years and while manufacturers continued to expand workforce, job creation was the weakest since February 2014.
Hungary’s PMI came in at 50.9 points in June, 1.4 points lower than in the previous month. The reading represents the lowest level this year, and is only 0.9 point above the threshold denoting contraction.
HALPIM – which conducts the Hungarian survey on a slightly different basis than in the rest of Europe – noted the country’s PMI has remained above the 50-point mark since the start of 2016, after dropping to 49.1 in December, the lowest level in two and a half years. Although the compiler insisted the stagnation was a blip, the index has struggled to show evidence of significant momentum across the first half of the year.
The erratic nature of the survey leads many analysts to doubt it as an accurate guide to eventual manufacturing output. However, it has clearly agreed in general with results that have proved extremely disappointing. Following five straight months of m/m declines, Hungary's industrial production finally returned to growth in April. The government has, meanwhile, launched a programme of stimulus after first-quarter growth sank to 0.8% q/q.
However, Capital Economics warns against any excessive pessimism, despite the likely additional drag from Brexit. The readings “are by no means a disaster”, they write. “Historically, they have been consistent with industrial production growth of around 3% y/y. Moreover, strong growth in consumer-facing sectors should help to mitigate the impact of weakness in manufacturing on GDP.”