PMI data suggest Central Europe recovery accelerating; Russia lags

By bne IntelliNews October 2, 2013

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Manufacturing PMI data for September suggests that the economic recovery in Central Europe is gathering pace, despite a slight drop in Eurozone activity. That saw the region starting to pull away from its CEE peers: although Turkey looks to have put its summer dip behind it, Russia's struggles continue.

The rebound in Central European manufacturing is growing stronger, according to the latest purchasing managers index released by Markit on October 1. In Poland, the PMI jumped to 53.1 points, the highest in more than two and a half years and the third month in a row that the number has been above the 50-point threshold separating expansion from contraction. Analysts at Capital Economics suggest, "the Polish PMI now points towards industrial production growth of just under 10% year on year, and supports our view that the economic recovery here may be surprisingly rapid."

Despite a slight drop to 53.4 from August's two-year peak, the Czech Republic was in the black for the fifth straight month. The surge since May is in stark contrast to the previous 13 months. "The data supports our view that the Czech economy has bottomed out," write RBS analysts, "and the recovery is underway."

Meanwhile, analysts at Commerzbank say that the details are more important than the headline blip. "New orders increased for the fourth month in September; this is more crucial than the headline, and depicts a strengthening underlying economy," they say.

Hungary recorded a second month above the threshold at 54.5 points, although the data is not as strong a guide to industrial production as elsewhere. "Rising exports, new orders and employment sub-indices suggest that Hungarian industrial output will remain in expansion in the coming months," write Citigroup analysts, "in line with our GDP forecast of 0.6% year on year."

All three Central European economies are hugely reliant on exports to the Eurozone, but even so outperformed through the month. While the single-currency region's manufacturing sector expanded for the third straight month to complete the third quarter in growth mode, its performance dipped, edging down from August's 26-month high of 51.4 to 51.1.

Vital for Central Europe in particular, Germany remained in expansion territory at 51.1 points, though the figure also represents a two-month low. "We must not get too carried away," warns Chris Williamson, chief economist at Markit. "Although signalling the best performance for over two years in recent months, the PMI slipped slightly compared with August and remains only just above the 50 'no change' level, indicating that this is still early days in what looks like a fragile recovery."

To that end, and despite the pull ahead by Central Europe, analysts still expect monetary policy to continue erring on the dovish side while inflation allows. Although Poland, whose monetary policy council meets on October 2, is expected to remain on hold for now, "Hungary will keep easing policy rates down to 3.0%," insist RBS analysts, "and we also believe that [foreign exchange] intervention remains on the cards in Czech Republic."

A similar mood prevails elsewhere, with the CEE region's largest economies having been belatedly hit recently by the effects of the Eurozone crisis. Russia has struggled the most, and while Central Europe is picking up speed, data from across the board shows the economy to the east slowing rapidly.

At 49.4, the Russian PMI reading was the only one in the CEE region to remain in contraction in September. "This adds to a run of weak hard activity data to suggest that Russia's economy didn't recover in quarter three," Capital Economics notes, recalling that GDP growth dropped to just 1.2% year on year between April and June.

"This is in stark contrast to the previous 21 months," RBS analysts point out, "in which the sector was in expansion, and during which time it was described as the outperformer in CEEMEA region." However, unlike many others, the Russian central bank is still struggling to fight inflation, tying its hands somewhat in what stimulus it can offer the economy.

On the face of it, Turkish manufacturing appears to be rebounding strongly. Turkey's PMI rose to a 30-month high of 54.0, up from 50.9 in August, showing the country's manufacturing sector has shrugged off the slowdown earlier in the year that culminated in the first contractionary reading in 12 months in July.

The drivers behind the improvement were the key sub indices of output and new orders, the latter enjoying the biggest monthly pickup since March 2010. New export orders also maintained their healthy reading from last month, increasing to 52.5 in September, from 52.1 the previous month.

However, William Jackson, emerging markets economist at Capital Economics, points out that while new orders jumped from 50.2 to 54.9, new export orders only edged up slightly. That means that the acceleration in Turkish manufacturing activity appears to have been driven by domestic rather than external demand. "Accelerating domestic demand, coupled with stable external demand, suggests that the current account deficit may have widened further," Jackson warns. "The upshot is that, while growth in the Turkish economy in [the third quarter] may be stronger than we had been expecting, the drivers of that growth still look worrying."

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