Tim Gosling in Prague -
Central Europe's manufacturing sector shrugged off a slight pullback in the Eurozone to extend its strengthening recovery, data from February's Purchasing Managers' Index (PMI) suggested. Of particular note is a hint that domestic demand is ready to make a comeback in the region.
For yet another month, the Czech and Polish PMI's suggested strong growth for their crucial factory output. Poland's PMI jumped from 55.4 in January to 55.9 - its highest in over three years, reports compiler Markit. A mark of 50 separates expansion from contraction, and the country saw the fastest growth of new orders in a decade.
The Czech Republic also continued its rising trend - which has now run for ten months - improving to 56.5 from 55.9. That signalled the strongest overall improvement in operating conditions since April 2011, and included the second fastest export orders growth in the survey's history, and the highest level since the record seen in June 2010.
Hungary did not did not keep up the regional pace, dropping from a record high in January of 57.8 to 54.3. However, the Hungarian reading is volatile and not widely relied upon by analysts due to its local compilation and poor track record of predicting actual industrial output. "The more stable Hungarian industrial confidence indicator, produced by the European Commission, actually rose in February," notes Capital Economics.
That export component is somewhat at odds with the data out of the Eurozone - the overwhelming destination for Central European exports - which saw its PMI growth dip to 53.2 from 54.0 in January, the first slowdown in expansion in five months. In turn, Germany - which dominates a significant chunk of demand for Central Europe output via supply chains - saw its index slow to a two-month low of 54.8.
At the same time, German manufacturing remains in expansionary mode, and with France, Spain and Italy all also seeing output rise, February marked the first month in almost three years in which output rose in the Eurozone's four biggest economies. Overall, the reading was the bloc's second-highest in close to three years.
Still, Chris Williamson, chief economist at Markit, sounds a note of caution. "The dip in the manufacturing PMI, its first fall for five months, is a disappointment and a reminder of the hesitant nature of the region's nascent recovery," he warned.
With that in mind, the rebound of domestic demand in Central Europe - earmarked by the European Commission last month as a central component of recovery in the region this year - is vitally important. "The new export orders were strong, but it was the domestic orders behind the record breaking levels [in Poland]," points out Agata Urbanska-Giner, economist at HSBC, which co-publishes the Central European PMIs. "This bodes well for the future growth."
"Encouragingly, new orders components rose sharply in both [Poland and the Czech Republic]," writes William Jackson at Capital Economics. "Moreover, in both economies, the overall new orders component, which includes both domestic and external new orders, increased by more than the new export orders component. This suggests that Central European manufacturers are benefitting not just from strengthening external demand, but also from an improvement in domestic demand."
By way of contrast, the best news for Russia was that the contraction of its manufacturing sector slowed in February. The country's PMI reading rose half a point through the month to come in at 48.5 in February. However, it marked the fourth successive month in which Russian manufacturing has been in contraction, and overall it has escaped that territory only once out of the last eight readings.
On top of that, a rebound in the near term looks unlikely. New orders fell for the third month running, and declined at their fastest rate since May 2009. "Highly concerning is that both domestic and export demand has eased," writes Alexander Morozov at HSBC.
Indeed, things are only likely to deteriorate. The data comes from before the country's military incursion into Ukraine, which is widely predicted to hit trade and investment. It's already seen the ruble drop to new historic lows, provoking a rate hike from the Central Bank of Russia on March 3. "As it happens, we suspect that the direct impact on Russian manufacturing should be relatively limited," Jackosn says. "However, manufacturers are still likely to suffer from dislocation in the financial markets."
"Thus, so far we do not observe any signs of import substitution in manufacturing on the back of the ruble weakening," adds Morozov. "In contrast, the faster rise in prices weighs on demand and output in this sector of the economy."
Despite being part of the same region as Ukraine, Central European industry is thought unlikely to be hit to any strong extent by the events there - assuming no wider conflagration that could disrupt energy deliveries from Russia to the region. Indeed, as KBC notes, local financial markets appear unconcerned. "The Czech koruna, the Polish zloty as well as the Hungarian forint hovered in narrow ranges around their current levels," the analysts point out, "and sell-offs only hit the Ukrainian hryvnia and the Russian ruble."
Another potential risk, however, is the response of the EU to Moscow's Ukrainian adventures. "Although the bilateral trade of the Czech Republic, Poland as well as Hungary with Ukraine is only marginal," KBC continues, "possible sanctions from European Union ... would undoubtedly affect international trade of CEE Europe, especially of Poland. We however do not think sanctions are very likely."
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