Tim Gosling in Prague -

Having pushed hard through the year thus far, Central European purchasing manager indices (PMI) presented a more mixed picture in May, according to data released on June 1. With Poland in particular showing a sharp slowdown, some analysts wonder if the region's manufacturing sector could be running out of steam.

The mixed message comes on the back of signs of a slowdown in the vital Eurozone markets that dominate demand for exports out of the Visegrad region. While remaining above the 50-point threshold that denotes expansion of the manufacturing sector, and indeed signaling a modest acceleration overall at 52.2, the result for the single currency area was driven by economies such as Spain, the Netherlands and Italy.

Those economies have tenuous links with the Visegrad region. By way of contrast, in Germany – whose supply chain drives a huge chunk of Central European activity –  the PMI reading dropped to a three-month low of 51.1.

“The rate of growth is modest rather than spectacular, however, and there are clearly countries which continue to struggle," notes Chris Williamson, chief economist at report compiler Markit. "Weakness is centred in the region’s core, with France’s manufacturing sector still in decline and Germany only seeing very meagre growth."

That will come as a disappointment in the Visegrad region, dampening the optimism raised by the robust growth recently reported in the first quarter of the year.

Poland's 3.6% economic expansion in the first three months of the year was boosted by the first net exports contribution to growth in 12 months. However, the PMI reading for the Visegrad region's largest economy was severely disappointing.

Despite remaining in expansionary territory for an eighth straight month, the reading dropped to 52.4 from 54 in April. That signals the weakest rate of growth in seven months, and a fourth straight month in which manufacturing growth has weakened. That has analysts wary.

“The PMI data for the past two months – alongside with a much slower official rate of IP growth in April – suggest that industry will weigh on GDP growth in the second quarter following the better-than-expected expansion in the first three months of the year," suggests Trevor Balchin, senior economist at Markit.

The analyst was in no doubt where to place the blame. “Poland’s continued manufacturing expansion in the months ahead will partly depend on the Eurozone’s nascent recovery gaining traction, and Germany’s performance in particular.”

However, the rise of the Czech reading by another 0.8 points to 55.5 in May suggests the single currency area may not be the only culprit. The small, open Czech economy is far more dependent on exports than its larger neighbour to the north, and within its PMI reading a solid increase in exports is noted, alongside most other sub-categories. Helped by ultra loose monetary policy, the country has led PMI readings in the region for many months, and recorded its fastest ever quarterly economic growth in the first three months of the year at 3.1%.

The country had the strongest rise in employment in over four years, even as the indicator climbed for the twenty-fifth straight month. Input price inflation hit a 15-month high. Firms linked upward pressure on costs to metals, oil- related materials and the strong dollar. Meanwhile, output prices rose at the fastest rate since December 2013.

"The PMI follows hot on the heels of the surprisingly strong GDP figures for the first quarter, where growth outpaced all other EU members, and suggests that a strong pace of expansion will be maintained in the second quarter," Balchin writes.

Hungary's PMI meanwhile spiked to 55.1 in May from 51.2 the previous month. Output increased at the fastest rate in 20 years and new orders expanded rapidly, according to the report from the Hungarian Association of Logistics, Purchasing and Inventory Management. 

The locally-compiled Hungarian reading is seen as highly erratic and far less reliable a guide to eventual industrial output. However, while both the headline figure and many sub-indices set new peaks for the month of May, both export and import indicators showed slowing growth compared with April.

Commerzbank analysts suggest they see "the Czech PMI as the true indicator of direction for the CEE manufacturing cycle." However, others pay more attention to the Polish disappointment, and hint at concerns that the year's strong recovery could be about to falter.

"Taking the Central European PMIs together with May’s manufacturing confidence indicator published by the European Commission, it looks like industry in the region has lost steam in Q2," notes William Jackson at Capital Economics.

At the same time, the analyst is not too down about it. "[T]his is by no means a disaster," he adds. "Indeed, our Central European manufacturing PMI is still consistent with industrial production growth of around 6% y/y over the coming months."