Tim Gosling in Prague -
Manufacturing PMI readings for February remained robust, reinforcing signs that the economies of Central Europe can battle through the headwinds from Russia and the EU. The strong showing could temper expectations for monetary easing in the region.
While the purchasing manager indices in the Czech Republic and Hungary have remained well above the 50 point threshold marking expansion from contraction for some time now, it's only since late in 2014 that Poland, the biggest economy in the region by far, has looked so solid. That reflects the rise of domestic demand across the region, taking up the slack in exports created by Russian sanctions, currency woes, as well as continued sluggishness in the EU.
At 55.1, Poland's PMI was little changed from January’s 11-month high of 55.2, notes HSBC, which compiles the data alongside Markit. It indicates "a further sharp overall improvement in operating conditions in the Polish manufacturing sector", the bank points out.
Czech manufacturers continued their bright start to 2015 in February. At 55.6 the PMI saw a slight decline from the 56.1 seen in January, but "still indicated a strong overall improvement in manufacturing operating conditions", HSBC says. The reading beat the 54.7 average seen over the indicator's 22-month run in expansion territory.
In Hungary, where the PMI data is seen as a far less reliable indicator for actual industrial production, the reading was 54.6, the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) reported. The result sees the index above the 50-point mark for a full 12 months. Accelerating from January's 54.3, PMI has started the year well after sagging somewhat in the second half of 2014. Imports and exports both increased.
The continued push in manufacturing in the region overturned worries that PMI could falter this month. The situation in Ukraine has led to worries of a lengthy stand-off between Moscow and the West, and the Russian economy and the ruble remain weakened, keeping a cap on export demand.
More directly, there was worry that sentiment amongst firms would be hit by the drawn-out negotiations with Greece and the consequent risk to the Eurozone economy. The single currency area absorbs an overwhelming chunk of Central European exports.
However, as Commerzbank points out, the underlying tone is "still firm as the German economy is accelerating and [the European Central Bank's quantitative easing programme] has boosted regional sentiment". On top of that, looking to March, the US Federal Reserve offered a somewhat dovish message in late February. That tempers fears of a US rate hike, which would likely pull some capital out of CEE markets.
Food for thought
The strong data gives more food for thought to Polish rate setters in particular. The monetary policy council is widely expected to cut the benchmark interest rate of 2% at its meeting on March 4 in a bid to curtail ongoing inflation. However, the board has been holding out against loosening policy, with economic results since the last easing in October remaining reasonably robust.
Growth rates for output and new orders remained sharp in Poland, Markit notes. Capital Economics says that the Central European PMI numbers are "consistent with regional industrial production growth accelerating to around 8% y/y over the coming months, up from around 4% y/y at the end of last year".
Yet on the other side of the coin is deflation. Both Polish and Hungarian rate setters have suggested they may ease policy this month to accompany new inflation reports from the central banks, as the pair battle dwindling prices. Alongside the strong overall performance of manufacturers, the PMI readings indicate a continued decline in prices across the sector. That will only feed into CPI in the coming months.
“The [Polish] survey data continued to highlight weak price trends in the sector, however, notably for prices charged by manufacturers for their finished goods," writes Trevor Balchin, senior economist at Markit. "These fell further in February, and have not risen since mid-2012. Input prices increased for the first time since November, but at only a marginal rate. The latest prices data will therefore add to calls for the NBP to cut rates soon.”
But at the same time, the strong PMI readings in the region could yet pull the eyes of rate setters to the risk of currency appreciation, given the possibility of capital inflows stoked by the ECB bazooka. Deutsche Bank analysts suggest the currencies in Poland and Hungary look set to gain. The pair is amongst "countries with strong fundamentals, a low inflation profile and which in our view benefit the most … from the upcoming QE by the ECB," the analysts note.
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