Spurred onwards by a strong showing in Germany, Central European manufacturing continued its recent growth in November according to Purchasing Manufacturing Index (PMI) data released on December 2. The numbers, the highest since April 2011, suggested the economic recovery in the region continues to strengthen. Turkey saw similarly strong gains. However, Russian manufacturing remains the odd one out as it struggles.
As has been the case for the last few months, PMI for Central European manufacturing shows the region leading the CEE region recovery. Poland and Hungary followed up impressive third-quarter economic growth with PMI readings of 54.4 and 52.6 respectively. PMI tallies new orders, inventory sizes, staffing levels and supplier deliveries. The threshold of 50 separates contraction from expansion.
The Czech Republic saw its economy dive back into contraction between July and September at -0.5% of GDP, but as analysts at RBS point out, its manufacturing sector - which is the overwhelming driver of activity - remains the outperformer in the region with a reading of 55.4. William Jackson at Capital Economics suggests that, "the sustained improvement in the Czech PMI indicates that the surprising fall in GDP in the third quarter was probably a temporary setback."
Heavily dependent on export demand out of the Eurozone, particularly Germany, the region's manufacturing sectors have begun growing in response to brightening prospects in the single currency area. The Czech and Polish PMIs rose for the seventh month in a row; Hungary's for the fourth.
The recovery in the Eurozone's manufacturing sector accelerated again in November, with the indicator in positive territory for the fifth straight month, reports compiler Markit. The reading of 51.6 was the highest since July 2011. Germany's reading of 52.7 was the highest for 29 months. However, there is some way to go for the wider economy, with Spain and France seeing new six month lows.
Chris Williamson, chief economist at Markit, said: "The November manufacturing PMI surveys bring good news on the whole, but suggest there's still a lot to worry about in terms of the health of the eurozone economy."
That leaves Central Europe exposed, although in general whither Germany, so it tends to follow. While there are hints that domestic demand in the region is starting to recover, having been on the floor for many months, export demand from the Eurozone remains in the driving seat. "Respondents in the (Czech) PMI survey highlighted new business opportunities, new customers and improving demand," writes Agata Urbanska-Giner, economist at HSBC, which prepares the Czech and Polish reports. The move by the Czech National Bank to weaken the crown will have helped pep up exports.
RBS says the data "is in line with our view that the worst is over for the Czech economy on the growth front, as the export led economic recovery begins to take shape." Capital Economics suggests that although PMI readings for Poland do not necessarily feed through entirely accurately to industrial production, "for what it's worth, on past form November's PMI is consistent with Polish industrial production growth of around 10% year on year."
While Hungary saw another expansionary reading, the figures, which are compiled locally, are seen as far less reliable for eventual output. At the same time, the central bank's Funding for Growth Scheme - which pushes cash through the banks to offer cheap credit to small businesses - has been credited with helping to cement the recovery.
While Central Europe has led the manufacturing recovery in CEE, the largest economies in the region have struggled somewhat to keep pace, as the crisis has caught them up just as Europe revives. Turkey and Russia have seen their manufacturing sectors performing poorly since the summer, but the pair has diverged increasingly in recent months.
Despite moves by the central bank towards tightening of monetary policy, Turkey's PMI improved again in November to hit 55.0 - its highest level since the second quarter of 2011. Of particular note is strong growth in export orders, which will be hugely welcomed by Ankara as it struggles to keep a lid on the economy's Achilles heel - a massive current account deficit. That's of vital importance as global markets await the US Federal Reserve's tapering of it quantitative easing programme, which will hit unbalanced economies hardest.
Russia doesn't have those issues, but that's unlikely to last for too long unless it can pull the economy out of its nosedive. Stagnant oil and gas revenue, continued capital flight and growing imports are all pushing the economy closer to its first current account since 2005. Manufacturing is not helping much, and dropped back into contraction territory in November at 49.4, to match the reading in both August and September, and leave October's apparent expansion looking like a one off.
"All in all, the situation in manufacturing in November resembles the one in the economy at large... a. output expansion still continues thanks to consumer demand, but at a decreasing rate; b. fixed investment fails to start increasing on a sustainable basis; c. global headwinds remain strong weighing on exporters," says Alexander Morozov, chief economist for Russia and CIS at HSBC.
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