Manufacturing data in Central and Eastern Europe offered mixed signals in July, as Purchasing Managers Index (PMI) readings diverged. However, the bigger economies in the region continued to sag into contraction, and central banks in Poland and Turkey will feel pressure to ease monetary policy further.
As has been the case recently, the Czech Republic offered the high point in the region as its PMI reading rebounded to 56.5 points in July after a "disappointing" 54.7 the previous month. With 50 points the threshold separating contraction from growth, July was the 15th consecutive month the country's manufacturing sector has been in positive territory.
However, although there were other July success stories, they're based on less reliable data. Illustrating the erratic nature of its locally-produced numbers, Hungary's PMI picked up to 56.7 in July from 51.7 in June.
Likewise, analysts and the markets are unlikely to concentrate too heavily on Russia's emergence from contraction territory as it hit 51.0 from 49.1 in June - the country's highest level since the October 2013. The Ukraine crisis kicked off around an EU summit in November.
However, analysts at VTB Capital remain to be convinced. "This pick-up … contrasts with both the hard data and anecdotal evidence, suggesting it is likely to prove short-lived statistical noise," they point out. "On a more positive note, the survey brings further evidence that the impact from the FX shock is dissipating as inflationary pressures moderated on both the costs side and output prices."
Of all the countries in the region. the Czech Republic follows most faithfully in the tracks of the Eurozone, and the single currency area offered stronger support than it has been doing recently. While the Eurozone as a whole saw its July PMI hold steady at the previous month's seven-month low of 51.8, it's Germany and supply chain demand that matters most for much of CEE. Germany saw its PMI hit a three-month high of 52.4, to help sooth building concern over the region's recovery.
However, that didn't translate for all. Poland in particular failed to respond, its PMI slipping instead into contraction for the first time in over a year. The country has been struggling to maintain the pace of recovery for some time, and saw its PMI decline for a fifth month in a row to 49.3 in July. "On balance this is a very negative result pointing to further weakness in manufacturing," writes Agata Urbanska-Giner from HSBC.
Whilst not as strongly linked as its Czech peer, Poland's divergence from the Eurozone path has many scratching their heads. Initial weakening earlier in the year was blamed on the Ukraine crisis, but the rapid darkening of the picture has surprised many.
"We find the fall in Poland’s PMI tricky to square with other indicators," writes William Jackson at Capital Economics. "After all, like the Czech Republic, Poland’s manufacturing sector is deeply integrated into German supply chains, so it should have benefitted from the improvement in manufacturing conditions there."
Turkey, too, is being buffeted by a mix of forces, and saw its PMI stuck in contraction for another month in July as it dropped to 48.5 from 48.8, the lowest reading since April 2009. "On past form, this is consistent with a [year-on-year] fall in industrial production of around 2%," calculates Jackson. "This comes on the back of the lagged impact of January’s interest rate hike as well as weaker export demand, particularly from Iraq."
Pressure on policy
Indeed, the data out of Turkey and Poland only strengthens the spotlight on monetary policy in those countries.
Melis Metiner at HSBC suggests the Central Bank of Turkey's lowered interest rates are already starting to offer some traction. "As a result of the CBRT's recent policy easing, there are early signs that domestic demand growth is accelerating," he notes. "Credit growth has strengthened, and import growth in Q2 was stronger when compared to Q1." However, the July PMI reading will likely keep the government on the back of rate setters.
The data will also push the monetary policy council in Poland, which has been resisting calls from the market - the recent scandal involving Governor Marek Belka and government ministers has pushed Warsaw out of the picture for now - to cut rates to help revive the economic recovery.
"Industrial production growth surprised to the downside in June slowing to just 1.7% y-o-y from 4.9% average in H1 2014 and the PMI survey points to more weakness ahead," Urbanska-Giner notes. "This, combined with looming deflation in the summer months, supports market pricing of interest rate cuts in Poland." The current betting is the National Bank of Poland should offer a cut in September.
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