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Central European manufacturers are shrugging off fears of Eurozone recession and are continuing to expand, according to purchasing manager indices (PMIs) for October released on November 3. But this only increases the dilemma for central bank rate setters.

Sharp drops in industrial production figures in August put analysts on tenterhooks, with worries building that slowing economic recovery in the Eurozone is set to depress growth  in Central Europe, which is hugely dependent on demand for exports out of the single currency area.

However, the PMI indices for September suggested the summer trough was the result of extended holidays, rather than a sign of systemic weakness. PMI readings for October also offer back up for analyst forecasts that  industrial output in the  fourth quarter will strengthen in both the Eurozone and Central Europe. Top of the pile perhaps is the return of Poland's PMI to above the 50-mark threshold that separates expansion from contraction.

The Polish figure for October rose to a six-month high of 51.2 after being in contraction territory since July. While Czech PMI dropped from September, the country continued its run in leading the region at 54.4. That is "consistent with a solid rise in industrial production of around 7%" year-on-year, points out William Jackson at Capital Economics. 

Hungary's reading, which is compiled locally, tends to be erratic, and is seen as a poor guide to actual output. However, it too rose in October, to 54.9 from a disappointing 52.7 the previous month.

Despite a sudden and deep lull in August industrial output, Hungary's PMI "has been above the 50-point mark for 15 months already", note analysts at Portfolio.hu. That said, they're clearly wary that the figures could be masking weakness. "The key question remains how long the extra capacities of vehicle manufacturing can keep pushing the sector forward and how drastically Hungary's exports will be hit by a general waning of the European business cycle," they warn.

Indeed, Eurozone PMI data remains lacklustre, although it inched higher compared with September to come in at 50.6. While Germany - the major driver of Central European export demand - did perk up, with its PMI at a two-month high of 51.4, a drop in the new orders category will do little to cheers regional manufacturers which rely on their role in the German supply chain.

"Perhaps most worrying is the trend in new orders, a key bellwether of future output growth, which declined for the second month running," writes Rob Dobsom, a senior economist at Markit, which compiles many of the PMI reports. "It is hard to see any significant near-term boost to performance while market demand remains insipid and beset by lacklustre domestic conditions, slowing export growth and ongoing economic uncertainties."

At the same time, Agata Urbanska-Giner at HSBC notes "Czech firms reported strong demand from Germany and the UK and a weakening demand from Russia, Ukraine and Poland". She adds that with other confidence surveys remaining weak, both the German and Polish PMI readings "need to be approached with cautious optimism" at best.

Dilemma

The erratic data and forecasts in recent weeks will only add to the dilemma for rate setters at the National Bank of Poland as they meet on November 5. Following a surprising 50 basis point cut in October to 2%, NBP head Marek Belka has strongly hinted that more easing will be carried out swiftly if it comes, but the size of any action is unclear.

Analysts have been calling for Polish rate setters to offer the economy enhanced stimulus to fight the effects of the Eurozone slowdown and Russian sanctions, and hence halt deflation. However, in the wake of the improved PMI data, a consensus for a smaller rate cut is evolving.

"Although we interpret the [optimistic PMI] results with caution, we think the figure supports our call for only a 25bp rate cut," suggest analysts at KBC. 

Urbanska-Giner agrees: "On balance improving business surveys support our forecast of growth consolidating in the coming quarters... This should encourage the Polish MPC to pause the rate cuts after what we forecast will be a 75bp adjustment in October and November."

Elsewhere, ongoing data is somewhat academic for rate setters that set rates at effectively zero over a year ago. "For the Czech Republic, the rate decision could rather be a non-event: the policy rate and the intervention level should both remain unchanged," suggests Jaromir Sindel at Citi.

Further than that, analysts are starting to question if regional monetary policy can really have much effect anyway at the moment, with global trends overtaking them. Erste analysts suggest "nothing currently points to a divergence away from the ongoing trend of solid growth in the US and the danger of renewed recession in the Eurozone. The push and pull ... from the increasing probability of QE in the Eurozone and normalisation of monetary policy in the US will likely continue."

Summing up, they assert that hopes of growth in Europe hinge to a large extent on currency weakness and falling energy prices rather than fiscal reform. "Monetary policy is deemed to, at best, boost asset prices with little impact on the real economy," they add.