Central European industry bounces back

By bne IntelliNews November 6, 2014

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Industrial production data for September out of the Czech Republic and Hungary on November 6 showed a strong rebound from the reported slump the previous month. The figures help dispel recent fears that the regional recovery is at risk of stalling.

Supporting claims that the unexpected slump of 5.2% year-on-year in August was mainly a result of extended holidays in the country's key car makers, rather than a sign of systemic weakness, Czech industrial production rebounded to grow 8.3% year-on-year in September.

It was a similar story in Hungary. Following flat output in August, again largely due to shuttered car plants according to analysts, industrial production grew 7.6% on an annual basis in September. 

The results will do much to encourage hopes that the region's small and open economies can push through recent weakness on the part of their main trading partners. Indeed, the Czech result in September strongly outperformed even the more optimistic analysts. A Dow Jones survey had pegged expectations at 4% growth. 

"As we wrote earlier, the negative August number was due to the moving date of German school holidays, which also influences the dates of company holidays," stress analysts at Erste. "Since industry works on a 'just in time' principle, the German holiday-driven decline influenced the Czech performance."

Forward looking PMI readings in both the Czech Republic and Hungary have also remained robust throughout the late summer and early autumn. Yet the raft of negative results in August has still had most on tenterhooks. Overshadowing all was weak data out of the Eurozone, and rising concern that it could tip back into recession in the third quarter. The result has been no little confusion, especially over monetary policy.

Fragile

However, there now looks to be improved clarity for most. The rebound in industrial activity adds weight to other data suggesting that the recovery in the Visegrad region may not be in as much trouble as recently feared. It backs up strong accelerations in retail sales in September reported by Prague, Budapest and Bratislava on November 5. 

However, Poland continues to stick out as more vulnerable, and is struggling to keep pace with its peers. Polish retail turnover was poor again in September - the slump of 1.8% was the fourth in the last five months. While Polish industrial production data for September - released on October 17 - offered a positive surprise at 4.2% growth, the country has been lagging for some months.

Yet it remains hard to see why the country continues to look fragile compared with the rest of the region. Analysts generally reject the idea that it is Poland's relatively large exposure to Russia and Ukraine that is doing the damage. Indeed, although Poland usually has far larger trade links in terms of volume with the troubled pair than most of its immediate neighbours, relative to the size of its economy the effects should be more than manageable. On top of that, at around 55% of GDP, Poland is far less reliant on exports than the rest of Visegrad, where the ratio is 70%-80%. 

However, that makes the poor retail sales data all the more concerning. Domestic demand has been a cornerstone of Poland's resilience to the crisis. Meanwhile, in line with other international institutions, the European Commission stressed in its autumn economic outlook on November 4 that domestic demand will be the key growth driver of the Visegrad economies over the next couple of years, as the Eurozone continues to struggle to provide export demand. 

The rest of the region appears to be rising to the challenge. All three are expected to show retail sales continuing their upward trend, backed by rising household consumption and salaries, and increased consumer confidence. "The underlying trend is strong," note analysts at Commerzbank.

 

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