Central European factory activity slows, Poland nears stagnation
By Marcin Goettig
WARSAW (Reuters) - Factory activity slowed across central and eastern Europe in June, with Poland nearly in stagnation and the pace in the Czech Republic declining, although the latter is still growing and is cushioned by the country's ultra-loose monetary stance.
The manufacturing PMI index for Poland fell to a lower-than-expected 50.3 points last month, a 12-month low, from 50.8 in May, data compiled by Markit and HSBC showed.
Anything above 50 implies growth, but in this case very slight.
The data raised the pressure on the Polish central bank to ease its policy, economists said, as Poland has one of the highest real interest rates in the region and is facing the risk of deflation.
Poland's monetary stance is in contrast with the Czech Republic, which has slashed rates to almost zero and is intervening to weaken the crown.
The Czech Purchasing Managers' Index (PMI) dropped to 54.7 in June from a 3-year high hit last month. The slowdown followed a decline in PMI in Germany, the region's main trade partner.
But the Czech data was still firmly in growth territory, aided by a central bank policy of weakening the crown currency, which has helped exporters.
The Polish PMI data came after a disappointing retail sales and industrial output reading last month, signalling that economic growth was likely to slow compared with the first quarter, when the economy expanded by 3.4 percent annually.
"June survey data from HSBC signalled a broad stagnation in Polish manufacturing business conditions," Markit said.
"As for the H2 2014/2015 outlook, improving labour market, strong investment performance in Q1 2014, recovering credit still suggest that the current weakness should not extend,” said HSBC CEE economist Agata Urbanska-Giner.
Hungary, which uses a different methodology for its PMI index, reported the index dropped to 51.5 in June from a revised 53.8 in May and was below the average of the past three years.
CONTRAST
The decline in the Czech PMI was mostly driven by external factors, said HSBC's Urbanska-Giner.
"This correction is in line with the German PMI's slide from the beginning of the year," she said. "Industrial production growth is still likely to be climbing higher in the near term."
The Czech index remained in growth for the 14th successive month.
After exiting a record year-and-a-half recession last year, the export-reliant Czech economy's recovery has gathered pace in the past two quarters, lifted by better trade with euro zone partners and improving domestic demand.
Revised data from the statistics office on Tuesday showed the economy grew faster than previously thought in the first quarter, expanding by 0.8 percent on a quarterly basis and by 2.9 percent on an annual basis, the fast since early 2011.
The central bank intervened to weaken the crown in November to fight deflation risks, helping boost exports and retail sales as shoppers stopped waiting for falling prices.
Poland's central bank has, in contrast, been reluctant to cut rates, still remembering years of stubbornly high inflation and afraid that strong economic growth would at some point trigger a rise in consumer prices.
Inflation normally accelerates in tandem with economic growth, but in Poland that link has been broken because credit has been slow, the government is reducing public debt and low inflation in the euro zone, Poland's biggest trade partner, has had a knock-on effect.
Poland's inflation stands at 0.2 percent in annual terms, deep below the central bank target of 2.5 percent.
"Our base-case scenario envisages a stabilisation of rates until year-end, but we note that the risk of a downward move in rates is increasing," Antoniak said, adding that the data also points to a slowdown in second-quarter GDP growth.
Poland's central bank starts its 2-day meeting on rates on Tuesday and will deliver its decision on Wednesday. All but one economists polled by Reuters last week expect the bank to keep its main rate at 2.5 percent.
(Writing by Marcin Goettig; Additional reporting by Krisztina Than in BUDAPEST and Jason Hovet in PRAGUE Editing by Jeremy Gaunt)
