Central European industry shrugs off VW scandal and emerging market woes

Central European industry shrugs off VW scandal and emerging market woes
By Tim Gosling December 1, 2015

The recovery of Central Europe's manufacturing sector remains on track, according to purchasing manager's indices (PMI) for the region released by Markit on December 1.

The pace of growth at Visegrad factories suggested by the forward looking surveys remains gradual, pulled along by the slow but steady recovery in the Eurozone. That said, they appear to have shrugged off the challenges posed by the slowdown in emerging markets and the Volkswagen scandal.

At 52.8 in November, the final seasonally adjusted Eurozone PMI matched its earlier flash estimate, posting its highest level since April 2014. The single currency area's PMI has remained above the 50 point threshold separating contraction and expansion for 29 straight months.

Central European factories have also been in expansionary territory for some time, minus the odd dip in Hungary, where the locally-compiled PMI survey is seen as erratic and a less reliable guide to eventual industrial output. The Czech Republic and Hungary PMI's rose again in November, while Poland's was largely flat on the month.

Dirty cars, fragile China

Following a reading of 52.2 in October, the Polish PMI came in at 52.1. While the result was "clearly below expectations", admit analysts at BZWBK, they also note that amongst the sub-indices, output and new orders rose at the fastest pace in several months; while employment growth was also high.

That detail, and the persisting overall rate of expansion in Polish manufacturing, is a positive sign for most. During the fourth quarter, the improvement in Poland's PMI matches the average registered in July-October, Markit points out. The current upturn in the sector now stretches to 14 months, which is the longest in over four years.

At the same time, there is concern that the country's PMI readings have remained sluggish over recent months, and that inflationary pressure is still entirely absent. Added to weaker than expected macro-indicators since the summer, it has some questioning the momentum in the overall economy.

The data "suggest GDP growth may well slow in the fourth quarter", writes William Jackson at Capital Economics. Polish GDP growth for the third quarter was reported slightly above expectations at 3.5% on November 30.

The Czech Republic's economy has been the star through 2015, with EU funds and the central bank's currency cap pushing it to the highest growth in the EU in the third quarter at 4.3%. The country's factories have been a major beneficiary of the weak koruna, enabling the country's PMI to rise yet again in November, pushing 0.2 points higher to 54.2.

It was, in actual fact, the second-weakest outcome in 2015 to date following October’s 10-month low, and Markit notes that data for the fourth quarter so far point to the slowest manufacturing growth since the third quarter of 2013, during which the economy was stuck in recession. Sluggish new orders weighed the index down, which is of some concern.

Still, Czech PMI has sat in expansionary territory for a full 31 months, and the dynamics improved. “The PMI arrested its recent slide in November, with the first month-on-month rise since July," points out Trevor Balchin, senior economist at Markit.

The Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) reported that the country's PMI rose 0.9 points to total 56.2 in November. A slight increase in new orders joined a stronger boost in output to help the index to its highest since July 2014.

The data out of the Czech Republic and Hungary suggests the pair has been largely unaffected by the Volkswagen emissions scandal – a major risk over the last few months given the huge chunk of industry in each that either builds VW group cars or serves the German auto industry as part of the supply chain. The slowdown in the Chinese economy has been another factor nervously watched by Central European factories, but also appears to have had little effect.

That's largely in line with recent analysis. In the Czech economy, "there is no reason for substantial negative expectations or panic" with regard to VW or China, Erste wrote in late November. "Unless new negative information emerges, we expect only mild effects on Czech GDP."


The data is further evidence that Visegrad is pulling away from the bulk of Central and Eastern Europe. The slowdown in emerging markets has seriously affected manufacturing in  Russia – where the PMI sank to 50.1 - and Turkey (50.9), with the spillover hitting other smaller states in the region also. However, Central European economies are instead being lifted by the gradual recovery in the Eurozone.

As Capital Economics notes: "Overall, our weighted-average PMI for Central Europe ticked up to 53.2 from 53.1. On past form, this is consistent with industrial production growth of around 5% y/y over the coming months."

The PMI reading for the Eurozone was confirmed at 52.8 in November, a 0.5 point gain on the previous month and it's highest since April last year. The PMI has now remained in expansionary territory for 29 straight months. The rates of expansion in production and new orders were the fastest in around 18 months, offering encouraging signals for the coming months.

Germany – the Eurozone economy responsible for by far the largest chunk of demand out Visegrad – was not a frontrunner, but still recorded a three-month high of 52.9. "The euro area’s manufacturing recovery continued to build momentum in November," Chris Williamson, chief economist at Markit, remarks.

It’s by no means a spectacular pace of expansion, however, broadly consistent with 2% annualised growth, and there are also few signs of underlying inflationary pressures picking up," he admits. However, "it would be wrong to get too gloomy about these data: the manufacturing sector is steadily reviving, and importantly generating jobs at an increased rate."

At the same time, with inflationary pressure nowhere to be seen, the fact that recovery in Eurozone factories remains sluggish will only encourage expectations that the European Central Bank will look to give the economy a jolt. The "scene is set for the ECB to unleash further stimulus at its December meeting to ensure momentum continues to build," Williamson sums up.