Central Europe's green shoots obscured by Eurozone snows

By bne IntelliNews April 3, 2013

bne -

Sticking the green shoots noted early in 2013 in the freezer, Central European manufacturing data dipped in March, following in the footsteps of the deepening malaise in the Eurozone, in particular Germany.

Dependent as they are on export demand from the single currency bloc, it's no surprise that Polish and Czech purchasing manager indices (PMI) dropped last month as the Eurozone's overall manufacturing PMI slumped to a three-month low of 46.8.

The results are disappointing following a better start to the year that, although the PMI numbers in both the Eurozone and Central Europe remained below the threshold of 50 that separates growth from contraction, had suggested a stable - if sluggish - recovery from the depths of the crisis.

However, March's figures suggest that may have been overly optimistic, which is a blow to the heavily export-dependent countries of Central Europe. As Chris Williamson, chief economist at Markit, compiler of the surveys, puts it: "The Eurozone manufacturing sector looks likely to have acted as a drag on the economy in the first quarter, with an acceleration in the rate of decline in March raising the risk that the downturn may also intensify in the second quarter."

The one straw for Poland and the Czech Republic to grasp is that it was the likes of Italy and France which did the most damage to the overall Eurozone reading, while Germany saw its PMI trimmed to 49.0. While that's officially back in contraction, such numbers often denote a slight expansion on the ground.

"Signs that the German economy is losing steam do not bode well for Central Europe," points out William Jackson at Capital Economics. "Nonetheless, it's still worth noting that the German survey data are consistent with Central European industry growing by around of 3% year on year or so - an improvement on the average of 0.5% year on year recorded last year."

Yet in seeing its 49.9 February reading fall back to 49.1, the Czech Republic actually saw new orders for export grow through the month, suggesting that what little domestic demand there is left in the country is now dwindling further. That in turn leaves the country even more exposed to Germany.

"New export orders changed little but the total new orders index declined from 50.5 in February, an eleven months high then, to 48.4 in March," points out Agata Urbanska at HSBC, which co-authors the Czech report. "Poor data from Germany are a downside risk for export orders next month and could push the headline PMI index lower again. The PMI survey shows that the contraction of economic activity might have bottomed in Q4 2012 but a recovery hinges on impulses from Germany, Czech's main exports market."

Poland - which until the second half of 2012 had seen strong domestic demand buttress its economy against the worst of the crisis - exhibited a more straightforward relationship with the Eurozone, with new export orders dropping to 47.0 last month from 49.6 in February. "[H]aving climbed every month to a seven month high in February, in March the PMI index fell to a five month low," Urbanska notes. "This is a disappointing result that highlights that the bottoming out of the 2012 slowdown continues to be questionable ... [and] undermines chances for a firm recovery through 2013.

The outlier in Central Europe - as so often - was Hungary, which saw its PMI reading rise to 55.7 from 54.1 in March, to lead the region yet again, despite having suffered the largest GDP contraction in Europe in the fourth quarter of the year. However, analysts point out that Hungary's data has different compilers, and that its PMI is commonly erratic and a poor guide for eventual industrial production numbers.

Due to that, analysts at RBS say the country's continued elevated PMIs in 2013 make little difference to their expectations on monetary policy. "The reading does not change our view for interest rates to continue being cut by 25bps at each of the next six MPC meetings to 3.5% to support a stagnant economy," they write in a note.

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