Central European purchasing managers’ indices (PMI), released on June 1, offered another hint that the surprise surge in manufacturing in the first quarter of the year faded in May.
PMI readings out of the region have been elevated for some months, driven by strong demand out of the Eurozone and expectations of a rebound in investment. Analysts have been waiting for industrial output to catch up, but it now appears that the forward-looking data will be the one to close the gap as output slows.
Boosted by robust activity and confidence in the Eurozone, which provides the bulk of demand for the small and open Visegrad economies, PMI readings have been pushing high above the 50-point threshold that separates contraction from expansion this year. The performance of exports helped drive economic growth in January-March that surprised as it surged above expectations, particularly in Poland.
However, there are signs that the momentum won’t last, with sectoral numbers and confidence indicators dropping in April. The added suggestion from May’s PMI readings that manufacturing growth is slowing will not buoy the mood.
That, again, is at odds with continued strong data from Eurozone manufacturing. The single-currency area’s PMI rose 0.3 points to a 73-month high of 57.0 in May. The gain of the German reading to a similar high of 59.5 should be good news in Visegrad, whose factories play a large role in the German supply chain.
However, Central Europe’s manufacturing outlook headed in the other direction in the fifth month of the year, even if the numbers still suggest decent expansion.
The Czech PMI – often invoked as the bellwether for the region – dropped 1.1 points to 56.4. While strong in an historical context, and driven by impressive expansion in new orders, the reading suggests the slowest growth in Czech manufacturing since January.
New export orders rose at the second-fastest rate since January 2015, with respondents crediting higher demand from the likes of Germany. But there are hints that structural imbalances – the growing labour shortage in particular – are starting to have an impact. Both supplier delivery times and work backlogs deteriorated in May.
“Labour shortages and supply constraints were highlighted in anecdotal evidence as weighing heavily on growth potential,” noted Sian Jones, an economist at compiler IHS Markit.
The fall in Poland’s PMI was even deeper as the reading fell 1.4 points to 52.7 in May. While the result remains above the historical average of 50.5, it also indicates the slowest growth in the manufacturing sector for six months.
The reading corresponds to weaker data on industrial production in April, when output surprised on the downside. Analysts were quick to attribute the fall to the calendar effect, but still the surprise was there, as consensus expectations were for expansion of over 2%.
That might signal the GDP growth surge of 4% y/y in the first quarter will be this year’s maximum and the momentum is beginning to fade. Disappointing growth in retail sales and a drop in economic and business confidence in May are additional clues that the outlook may be dimming slightly.
On the positive side, the Polish PMI remained above the 50-point threshold for a 32nd consecutive month, while some analysts sought to cling to the extreme optimism incurred by the strong first-quarter GDP data. “It seems that the stronger zloty and lower oil prices could be behind the dip, as input and output price inflation softened,” KBC noted.
However, Markit noted that output, new orders and employment all increased, but at slower rates than in April. “Price pressures eased further, as indicated by a softening of both input and output price inflation. Average cost burdens for Polish manufacturers continued to rise sharply overall, however,” the report added.
Demand for manufactured goods eased overall – although foreign orders increased – and job creation in the sector was also at its slowest in seven months in May.
Hungary's PMI reading accelerated to a record high 62.1 points in May, up from 56.2 points in April, the Hungarian Association of Logistics, Purchasing and Inventory Management (Halpim) announced. The May average for the last three years was 53.3 points.
The index topped the 50-point mark for a 21st consecutive month. The sub-index of new orders and employment rose to the highest level in May since Halpim began tracking data in 1995. The index of imports and exports have now both expanded for over 20 straight months, signalling robust growth in trade.
"Manufacturers in Hungary have been supported by a recent sharp cut to the corporate tax rate, from 19% to 9%," said Liam Carson at Capital Economics.
Hungary's industrial production showed robust growth in March, a key contributor behind the better-than-expected Q1 GDP data. Along with strong confidence, the PMI index suggests the continuation of economic expansion. The erratic nature of the locally-compiled Hungarian PMI survey, however, generally makes it an unreliable guide to eventual manufacturing output.
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