Central European manufacturing recovery still slowing

By bne IntelliNews July 1, 2014

Jan Cienski in Warsaw -


The Eurozone's economy's drag on Central Europe is spreading, with the region's largest countries all showing less sprightly manufacturing growth last month, according to new Purchasing Managers Index (PMI) numbers out on July 1.

Eurozone PMI came in at just 51.8, adding to concern that the industrial sector's recovery is losing steam. That threatens negative effects for Central Europe thanks to the region's tight ties to the common currency area.

Poland, the region's largest economy, noted its fourth consecutive month of slowing PMIs, reaching 50.3 in June, down from 50.8 in May. A reading over 50 signifies manufacturing expanded over the month, which shows that Polish factories are at least seeing growth.

However, the expansion is now wafer thin, which bodes ill for the wider economic recovery. The broader slowdown was earlier confirmed by industrial production data for May which disappointed by capping growth at an annual 2.7%. The first four months of the year saw an average of 5.7% expansion. 

Piotr Kalisz of Citi Research writes, "The data breakdown shows that the deterioration in the overall PMI was due mostly to weaker export orders." However, he goes on to say that, while PMIs are lacklustre, other areas of the economy are still fairly sound and that there is a "relatively limited" risk of a substantial slowdown. "Given this divergence and the strength of the output component, we stick to our forecast of approximately 3% growth in 2Q," he writes.

Spreading correction

Other CEE economies also flattened in June. Czech manufacturing PMI fell to 54.7 from 57.3 in May. 

Agata Urbanska-Giner, CEE economist with HSBC, which compiles most of the PMI data with Markit Economics, writes, "This correction is in line with the German PMI's slide from the beginning of the year. ... export orders index fell to the lowest in twelve months."

Hungary, which compiles its own PMI data, saw a slowing to 51.5 in June from 53.8 in May. However, the Hungarian numbers are taken as a less reliable indicator of the situation in the real economy.

The region's slower growth is likely to have implications for monetary policy, as central banks contemplate whether to cut rates further.

The Czech National Bank said last week that it will maintain its unconventional loose monetary policy for longer than originally forecast as it seeks to lower the value of the crown. The tactic has clearly helped the country maintain exports to the Eurozone in the face of the slowdown there.

Erste Group feels that the National Bank of Poland - beset by the recent tapes scandal - will hold to its record low benchmark rate of 2.5% this month, but that a cut may be possible in the autumn. "Signs that the recovery is not that strong keep coming," writes Katarzyna Rzentarzewska.

In Hungary, rising pressure on the forint is likely to limit scope for cuts to one to two 10 basis points cuts, finds Kalisz.


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