German momentum helps Czech factories shake off remaining summer lull

By bne IntelliNews November 1, 2016

Czech manufacturing continued to recover from a summer lull, shows the country’s purchasing manager index (PMI), released on November 1.

After dipping below the 50-point threshold separating contraction from expansion in July, the Czech PMI has risen steadily since and rose to a five month high of 53.3 in October. The recovery is driven by a return to work by factories after summer breaks and growing activity in the Eurozone, and Germany – the destination for a huge chunk of Czech exports – in particular.

Unusually, the PMI readings out of Visegrad peers Poland and Hungary will be released a day later than the Czech numbers this month. However, they are thought likely to also show increased activity in the regional manufacturing sector.

Analysts note that while uncertainty remains, momentum appears to be building. “Admittedly, the manufacturing component of the [European Commission’s] economic sentiment indicator for October, released last week, weakened across Central Europe,” writes William Jackson at Capital Economics. “But we would note that the PMIs have tended to have a stronger relationship with the hard activity data in recent months. All in all, these data support our view that, while growth in Central Europe won’t return to the rates seen in 2014-15, it will remain relatively robust over the coming quarters.”

The sharp fall in EU funding, as absorption the bloc’s new window gets underway, is a major element in that slowdown this year, as public projects and investment are held back. However, Germany’s manufacturing PMI rose to a 33-month high of 55.1 in October, Markit estimated in a flash release on October 24.

That led the Eurozone to a 10-month high of 54.4. Reflecting those improvements, new export business at Czech factories rose for the first time in four months last month. Domestic demand remains a key driver also.

That helped drive the headline PMI to its strongest overall growth rate since May as it rose from 52.0 the previous month. The October reading takes the index back above its long-run average, which now sits at 52.9.

Output and new orders both increased at the fastest rates since March, while growth in jobs, exports and purchasing underlined the overall improvement in business conditions, compiler Markit notes. The survey does, however, signal rising pressure on margins, as input price inflation – mainly driven by oil and metals - accelerated to a 16-month high, but prices charged by manufacturers sank.

“The positive survey results follow on from the rebound in official manufacturing output in August, which rose 7.7% year-on-year on a calendar adjusted basis,” writes Trevor Balchin, senior economist at IHS Markit. The compiler said that as a result it has increased its 2016 growth forecast for Czech industrial output to 3.3%.

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