Germany offers CEE silver lining in weaker Eurozone manufacturing

By bne IntelliNews February 22, 2013

bne -

Rising hope that the Eurozone is on the mend took a knock on February 21 as monthly manufacturing and services data suggested that activity dropped this month compared with January. However, the continuing recovery in Germany offers a brighter picture for many CEE economies.

Markit reported that its Eurozone PMI Composite Output Index fell to 47.3 in February from 48.6 in January. With a figure below 50 signifying a contraction, the decline signals a steepening of the economic downturn, contrasting what has been an easing trend over the previous three months.

Business activity has now declined throughout the past 18 months, Markit points out, with the exception of a marginal increase in January 2012.

At the same time, despite an acceleration, the rate of contraction in February remains slower than the post-crisis record seen in October 2012, and the average drop in activity in the first quarter so far is less severe than the trend for the fourth quarter of last year, Markit points out.

Coming on top of a suggestion from the US that the US Federal Reserve could halt its quantative easing operations early, the news sent equity markets falling across the globe. The liklihood that the US central bank is ready to join the European Central Bank (ECB) in drawing liquidity back out of the market is unlikely to do much for the emerging market bond rally that CEE states have taken advantage of over the last few months.

Teutonic

Germany provided one of the few silver linings, which should be good news for Central Europe's export-dependent states. Output rose for the third month running in Germany, albeit at a slower rate, contrasting with the accelerating rates of decline elsewhere - particularly France.

German manufacturing provides by far the largest chunk of demand for exports out of countries such as the Czech Republic and Slovakia, and Markit's chief economist, Chris Williamson, notes that the data suggests the German economy as a whole is looking in far better shape than at the end of 2012. "Germany is on course to grow in the first quarter," he writes, "recovering from the 0.6% GDP fall seen in the fourth quarter, possibly expanding by as much as 0.4%."

A further fillip for CEE states given their reliance on manufacturing exports is that expectations for the sector across the Eurozone rose to their highest for close to 18 months in February. Markit reports that the forward-looking manufacturing new orders/inventories ratio rose to its highest since mid-2011, suggesting that increasing numbers of firms will seek to raise production in March. At the same time, among German service sector firms, optimism reached a 20-month record this month.

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