Central European PMIs shrug off Eurozone weakness

By bne IntelliNews February 2, 2015

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Purchasing manager indices (PMI) for January, released on February 2, suggest Central Europe's vital manufacturing sectors continue to show resilience in the face of the sluggish Eurozone economy and pressures arising from the Russia-Ukraine conflict.

Poland led the upswing, with its PMI reading, compiled by Markit and HSBC, swelling to 55.2 - it's strongest since February 2014. The growth of production, new orders and exports all accelerated. The month-on-month increase over December's reading of 52.8 was the largest in three years.

Czech manufacturers received a boost from stronger demand and falling input prices to push the PMI reading to 56.1 from December's 17-month low of 53.3, HSBC notes. The month-on-month increase was the largest since August 2009.

The Hungarian indicator, compiled locally and somewhat erratic, is seen as a less reliable guide to future industrial production data. However, it followed the regional trend as it rose to 54.2 from 50.9 the previous month. However, while January's output increase was strong, new orders saw only a small gain.

Matching mid-term forecasts, domestic demand is taking over as the primary force supporting manufacturing in the region. However, the recent pressure on regional currencies probably continues to help exporters - which make up the bulk of economic activity, especially in the Czech Republic and Hungary - as they battle tough external conditions. 

That pair's PMI readings over recent months have remained mostly buoyant, despite the pressures. Poland, on the other hand looks to be recovering from a dip that began in the summer.

"A sharp surge in the Polish index, which hit the highest level since February last year, will likely have the strongest market impact, suggest analysts at KBC. They also point out that the reading "was broad-based and went hand-in-hand with improving situation on the labour market". New export orders rose for the third successive month.

Reaching for the bazooka

"These data contradict the more downbeat tone of the EC's Economic Sentiment Indicators published last week," notes William Jackson at Capital Economics. "But for what it's worth, January's PMI readings point to industrial production growth in Central Europe of around 8% y/y over the coming months, up from 3% y/y in November." 

The boost in the outlook for the region comes despite virtual stagnation in Germany, the driver of a significant chunk of demand for exports, which dropped to 50.9. Although still above the 50-point threshold denoting expansion, the indicator continues to fall in Europe's largest economy, with a poor employment picture and marginal new orders growth.

Much of that weakness is due to poor export demand across the Eurozone. Although the single currency area's PMI rose to 51.0 in January from December's 50.6, growth remains modest. The risks posed by the political situation in Greece did much to dent confidence.

At the same time, there is hope that the European Central Bank's quantitative easing programme announced on January 22 will offer the Eurozone a leg up, aided by the plummeting oil prices. The likely overspill for Central Europe's economies is behind the instant firming of regional currencies over the last week or so.

"The ECB's 'bazooka' of full-scale quantitative easing should boost the euro area economy via improved business and consumer confidence and the weakening of the euro," notes Chris Williamson, chief economist at Markit. 

"The currency's fall should benefit exporting manufacturers in particular over coming months," he continues. "Lower oil prices will also help reduce manufacturers' costs, with reduced fuel costs also freeing up more consumer income to spend on goods."

Hawk support

The strength of the PMI numbers in Central Europe however gives more ammunition to hawks at the region's central banks, which are in the spotlight over their reactions to the external pressures. While the real economies appear to remain robust, many are calling for interest rate cuts to fight deflation. The ECB's scheme has opened the space for action by propping up regional currencies and introducing the risk of speculative capital inflows.

Poland's rambunctious MPC is at the forefront of those bets. "At the margin, these data are likely to make central banks a little less dovish," suggests Jackson. "Indeed, we think the recent strong run of activity data in Poland means the MPC there will opt to leave interest rates unchanged, rather than lower rates, at its meeting on [February 4].

Agata Urbanska-Giner at HSBC suggests the strong PMI readings will have a similar effect in Prague, with the Czech National Bank due to meet a day after its Polish peer. "The PMI reading supports the current CNB rhetoric of robust growth outlook outweighing short-term positive supply side shock," she writes. 

At the same time, the analyst admits the report "still also confirms deflationary risks in the near-term". Falling prices for oil and other commodities led to an overall decrease in Czech manufacturers' average input prices in January, ending a 16-month sequence of inflation.

"Although the regional PMIs look good, a slump in January's inflation (to -0.5%) in Germany and subsequently also in the euro area as a whole, reminds us why the ECB launched a new wave of massive monetary easing," points out KBC.

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