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Central European manufacturing is fighting hard to keep its head above water, even while activity in the Eurozone continues to dwindle, PMI readings released on October 1 revealed.

Extending the trend of recent months, Central European Purchasing Manager Index readings came in either side of the 50 point threshold that separates contraction from expansion. Leading the way was the Czech Republic, which came in at 55.6; Polish manufacturing continued to fall with 49.5. 

The Hungarian reading rose to 52.6 after having dropped to 51 in August. However, the data for that country is compiled locally, tends to be erratic and is not seen as a reliable indicator of actual activity. 

Manufacturing in the single-currency area edged closer to stagnation in September, with the PMI reading falling to a 14-month low of 50.3. Chris Williamson, Chief Economist at compiler Markit, said: "September's Eurozone PMI makes for gloomy reading. The euro area's manufacturing economy has lost the growth momentum seen earlier in the year, lurching closer to stagnation. The near-term outlook also looks worrying."

Of particular concern for Central Europe is the fact that Germany is now succumbing to the Eurozone weakness.  German manufacturing - the major driver for surrounding economies because of their roles in its supply chain - dropped into contraction for the first time in 15 months at 49.9. 

The reading suggests "the region's northern industrial heartland has succumbed to the various headwinds of weak demand within the euro area, falling business and consumer confidence, waning exports due to the Ukraine crisis and Russian sanctions," wrote Williamson.

Stamina

That will bring more pressure to bear on the likes of Hungary, whose PMI has been above the 50-point mark for 14 months straight. "The key question is how long the extra capacities of vehicle production can keep nudging the sector forward and how drastically Hungary's exports will be hit by a general deflating of the European business cycle," suggested analysts at Portfolio.hu.

The Czech Republic, the star PMI performer in Central Europe so far this year, faces similar uncertainty over its stamina, amid concerns over how long the central bank’s (CNB) loose monetary policy can keep the country's manufacturers afloat. For the moment, however, strong export demand helped push September's PMI to a four-month high. 

"For now export growth remains good, averaging 8.7% y-o-y in January-July, up from 0.2% y-o-y in 2013. Looser fiscal policy is another support factor," wrote Agata Urbanska-Giner, Economist for Central & Eastern Europe at HSBC, which jointly compiles the PMI report. "This should support the current policy stance of the CNB - zero bound interest rates and a cap on FX appreciation." 

Poland's September reading made it a clean sweep in the third quarter, with all three months showing a contraction. However, the slowdown moderated after having dropped to 49.0 in August. 

Still, after the strong start to the year, the third quarter downturn in PMI is just the latest in a raft of disappointing macro releases out of Poland. Industrial production data has  "surprised to the downside in recent releases, including a 1.9% y-o-y contraction in August," said Urbanska-Giner. Analysts have been at pains to explain Poland's struggles, with few accepting that the country's exposure to Russia and Ukraine are sufficient causes.

Certainly, the National Bank of Poland appears unclear over where the pressure is coming from for an economy far less exposed to the Eurozone than its neighbours. However, the market is now convinced there will be a rate cut, and it is pricing in a 50 basis point reduction in interest rates to 2% for the monetary policy meeting later this month.

The PMI figure is only "likely to provide further ammunition to the doves on the central bank's MPC," pointed out William Jackson at Capital Economics. That said, his expectations remain somewhat hawkish: "We expect a 25bp cut in the benchmark interest rate next week, bringing it to 2.25%.”