June 4, 2012
Following a poor showing in April and slowing GDP growth in the first quarter, May manufacturing data released on June 1 has added to worries about the impact that the Eurozone crisis is having on the economies of Central and Eastern Europe.
The Purchasing Managers Index (PMI) data, compiled by Markit for HSBC, showed new orders for Czech manufacturing fell to 47.6, from 49.7 the previous month, the lowest since August 2009. Meanwhile, the index in Poland dropped for the first time since July of the same year, to 48.9 from 49.2 in April. A figure below 50 marks a contraction.
Whilst Hungary apparently did far better, jumping to 52.2 from a poor 47.1 in April, the figures out of Budapest these days are taken with a pinch of salt. As William Jackson of Capital Economics notes: " The Hungarian PMI has proven volatile in the past – it came in at 57.7 in March... and, as we have noted before, it has often diverged from other surveys such as the [European Commission's] industrial confidence indicator (which itself fell in May)."
Behind the bad news was the fall in Germany's PMI to 45.2 from 46.2 in April – the fastest fall for the country's manufacturers in three years. As the lynchpin for CEE economies, German demand for their exports is clearly dwindling rapidly after standing up better than feared in the first quarter, and for the likes of the Czechs and Hungarians – whose GDP is 80% or so dependent on exports to the Eurozone – that bodes ill. "Eurozone manufacturers reported a deepening downturn in May, indicating that the damage to the real economy caused by the region's financial and political crises continues to spread across the region," said Chris Williamson, chief economist at Markit.
HSBC economist Agata Urbanska predicts that, "Incoming Eurozone data points to this deterioration likely extending in the coming months," a view borne out by the fact that new export orders fell to their lowest levels since mid-2009 in Poland and the Czech Republic. The weaker external demand takes longer to impact Poland, however, because thanks to a far more robust level of domestic consumption, making it less dependent on exports than the Czech Republic or Hungary.
Capital Economics' Jackson says in the Czech Republic, the PMI is now consistent with a contraction in industrial production of around 2% year on year. "The one crumb of comfort is that, on past form, a PMI of around 46 in Poland… is consistent with industrial production stagnating in annual terms."
However, that may not stay the case, Jackson suggests, claiming that "it's worth noting that [CEE's] manufacturing PMIs may still overstate the health of the region's industry. A weighted average of Central Europe's manufacturing PMIs typically follows the Germany PMI. However, in the past few months the CEE measure hasn't fallen by nearly the same extent as the German PMI."
Yet the options for the region's governments and central bankers to react are limited. The majority have little room for manoeuvre to stimulate their economies, although the Czech Republic, which continues to follow a fast-track fiscal consolidation drive, is the exception.
Low state debt and borrowing costs, added to a strong currency, opens the door to monetary easing, with the Czech National Bank thought likely to vote for a cut at its next meeting from the 0.75% benchmark that it has kept for two years. However, Prague has regularly insisted that it will maintain the rapid rate of consolidation, claiming that the advantage this gives it in the international debt markets – where it enjoys yields significantly below most EU peers – is key.
By way of contrast, Warsaw hit out at the National Bank of Poland in May after it hiked rates in a bid to battle sticky inflation and a weakening zloty. Although slightly below consensus, first-quarter growth of 3.5% year on year reported on May 31 did little to raise the hopes of those calling for a cut. "Given no signs of improvement in the situation abroad, the impact of negative external impulses will grow," says Urbanska. "Fiscal policy is being tightened and only monetary policy has the flexibility to respond to a potential growth slowdown."