CEE manufacturing data strengthens green-shoot optimism

By bne IntelliNews March 4, 2013

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Purchasing manager indices (PMI) for manufacturing in the Eurozone and Central Europe provided more ammunition on March 1 for those arguing the region's economies are recovering after hitting bottom in the fourth quarter.

With Central European states almost entirely dependent on manufacturing exports as the only significant driver of growth, signs of new life in the February PMI reports - albeit the markets remained in contraction for the most part - offer more optimism that the improved sentiment seen around the markets may well be more than a new year's lift.

Further than that, the reduced contraction in the Eurozone PMI reading - one of the best in a year at 47.9 - offers even more brightness for economies overwhelmingly dependent on the single-currency bloc for export demand. Looking more closely, the recovery of Germany's PMI - back above the threshold of 50 marking contraction from expansion - to its highest in 13 months at 50.3 offers even greater hope for CE, given its central role in driving their exports.

Improved performance in both German domestic demand and exports is significant, Chris Williamson, the chief economist of the compiler Markit, points out. "The combination of a revival in export orders and resilient domestic demand has helped propel Germany's growth so far this year," he says.

That has new orders flowing again, which is good news for Central Europe's economies, which supply many parts and products. "Germany was a bright spot," the report notes, "with growth of total new orders hitting a 21-month high and supported by a solid upswing in new export business (the sharpest since May 2011)."

The Czech Republic is one of the most heavily dependent on Germany for export demand, which with domestic demand pitiful, left the economy in recession in 2012. Its headline PMI reading of 49.9 in February signified a second rise in a row from December's 41-month low, and is the highest since its last positive reading in March 2012. Significantly, the new orders component moved above the expansion line for the first month in 11.

Although the figures remain officially in contraction, analysts at Capital Economics claim, "in reality a PMI reading of as low as 48 has been consistent with an expansion in Polish production. The weighted average PMI for Poland, Hungary and the Czech Republic edged up to 49.9 last month, which on past form, points to average growth in industrial production of around 3% year on year across the three economies."

Next door in Slovakia, the 2012 star of the Eurozone continues to struggle. Its manufacturing confidence worsened as production expectations erased the improvement seen over the last couple of months. That said, the dimmer outlook was not seen in the vital car industry.

Just as reliant on the Eurozone, Hungary's PMI remained in expansionary territory for another month - although it dipped to 54.0 from 55.9 in January. However, the country's differently calculated figure has proved highly erratic recently, and is not seen as a reliable guide to eventual industrial production data.

Like the Czechs, Poland also saw yet another contraction in its headline PMI figure of 48.9, suggesting activity dropped for the 11th straight month as its late slowdown in domestic demand continues, but the rate of contraction was the lowest since July. The drivers of the improvement were employment and new export orders, which both rose significantly. In particular, the new export orders component is now close to the expansion threshold, and at its highest since March.

On top of the vastly improved Polish data last week on retail sales and fourth-quarter GDP growth, the evidence of recovery is stacking up enough that RBS analysts say they now firmly believe the central bank is done with its easing cycle.

BS analysts also note that the Czech Republic's reading is in line with the comments from Czech National Bank governor Miroslav Singer, in which he highlighted "the start of a gradual return to normal economic conditions", which relegates foreign-exchange intervention firmly to the sidelines.

Analysts at Citigroup are less sure that the region's central banks will be confident enough to abandon their stimulus drives on the back of the data, but admit that the picture is looking much brighter. "Mixed green shoots do not change our general view of further monetary policy easing in CEE, though there are some upside risks," they write.

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