Analysts: PMI data show Central European recovery

Analysts say that the region enjoys an advantage in terms of growth momentum compared with most other emerging market regions globally. Hungary’s PMI jumped to its highest level in seven years. This article, originally published on portfolio.hu, reviews what experts had to say in connection with the region's PMI results.

Gillian Edgeworth, UniCredit, London

"The manufacturing PMIs for January re-enforced Central Europe's advantage in terms of growth momentum compared with most other emerging market regions globally. Q4 had already shown solid improvement, though the PMIs in Czech, Poland and Hungary ticked downwards in December.

"January saw all three countries recover December's loss and more. At 55.9, Czech's PMI is at its highest level since May-11 and almost 3.5 points above its long term average. At 55.4, Poland's PMI is at its highest level since Jan-11 and over 5 points above its long term average. Given much higher volatility in Hungary's PMI, we attach less importance to it. Nonetheless it rose over 7 points in January to 57.9. In all cases, orders, in particular export orders, showed improvement, re-inforcing the benefits to Central Europe from strong production links with Germany.

"Turkey's PMI slipped, though at 52.7 it remains above its long term average. This is a weaker performance than Q4 as a whole but still stronger than Q3 as Turkey also benefits from a stronger EMU. This manufacturing performance is reflected in IP, with Turkey amongst the strongest in the region over the three months to November, and acts as an important cushion for the contraction in domestic demand that is currently underway. TRY weakness is behind soaring input (75.9, up 12.1 points on the month) and outprice price (63.4, up 9.9 points on the month) indices. This was partially captured in this morning's CPI release, showing January inflation at 7.5% yoy, a little higher than consensus and up from December's 7.4% yoy.

"Russia, once again, is the outlier. At 48 and down 0.8 points on the month, Russia's manufacturing PMI was weak. This follows up on 2013 when industry failed to grow while last week saw Russia post full year GDP growth of 1.3% for 2013 as a whole. On Friday Deputy Minister for Economic Development Andrey Klepach argued that growth should accelerate from here, supported by RUB depreciation. But we expect any recovery in activity to be gradual in nature while we are concerned that RUB depreciation at this stage brings more negatives in terms of accelerating domestic capital outflows than it does positives."

William Jackson, Capital Economics, London

"January’s manufacturing PMI data provide further evidence that the economies of Central Europe are enjoying a decent recovery, but that manufacturing in Emerging Europe’s two largest economies, Russia and Turkey, is struggling.

"January’s data suggest that the recovery in the highly-open economies of Central Europe (the Czech Republic, Hungary and Poland) is gathering steam. Our weighted average PMI for these three economies rose to 55.9 (from 53.1 in December), its highest level since January 2011. Manufacturers here have benefitted from the improvement in the German industrial sector, into which they are deeply integrated via supply chains. Note that Germany’s manufacturing PMI rose to a 32-month high last month.

"The Central European PMIs have tended to overstate the strength of manufacturing production in recent months. But for what it’s worth, January’s PMI is consistent with growth in manufacturing output from these three countries accelerating to as much as 12% y/y.

"Hungary’s PMI rose to its second highest level in the series’ ten year history last month, at 57.9 (from 50.5 in December). As we have noted before, this survey (which isn’t produced by Markit) tends to be highly volatile. However, the more stable industrial confidence survey, published by the European Commission, is also high by past standards and points towards industrial production growth of 10% y/y or so.

"Meanwhile, manufacturing PMIs in the Czech Republic and Poland rose to their highest levels since early 2011. In Poland, the overall new orders PMI component (which includes both domestic and external new orders) rose by more than the new export orders component. The implication from this is that, alongside improving demand from key export markets, Polish manufacturers are benefitting from strengthening domestic demand.

"In contrast to the improvement in Central Europe, manufacturing in Russia and Turkey appears to have taken a turn for the worse. Russia’s PMI fell to 48.0 last month, its lowest reading since June 2009. The relationship between the PMI and the actual manufacturing production data has broken down over the past couple of years. Nonetheless, today’s survey reinforces the impression from the latest activity data that the economy is still struggling.

"Meanwhile, the fall in Turkey’s PMI from 53.5 to 52.7 wasn’t as bad as might have been expected, given the political crisis and fall in the lira since the middle of December. That being said, since the survey was conducted during the middle of last month, it won’t have captured the very sharp fall in the currency at the start of last week that forced the central bank to tighten monetary policy aggressively."

Eszter Gárgyán, Citi, Budapest

"The published data supports our view that Poland is on the path towards 3-3.5% growth in 2014, beating consensus estimates. In Hungary we expect GDP growth to accelerate to 1.9%YoY in 2014 but to fade to around 1.3-1.5% thereafter as the underlying drivers of domestic demand remain weak. Czech PMI suggests to us an ongoing recovery in the industrial production with above 7%YoY growth in the near term, which is well above 3% growth suggested by the industrial confidence. On balance, if external demand recovery remains in place, industrial output could increase by 4.5%YoY in 2014 up from 0.7% in 2013.

"The strong data from Poland supports our view that the NBP will likely start the tightening cycle already in September or October as the economy recovers. In the Czech Republic, we expect the CNB to keep its desired level of EURCZK closer to 27 rather than 28 to strengthen the positive impact of weaker koruna on Czech exporters. We expect the first hike in CNB’s policy rate in 1Q16 as we assume monetary conditions will be tightened by a stronger koruna in 2H15 first.

"In Hungary the NBH faces the biggest challenge as domestic drivers of growth and inflation pressures remain weak but markets demand higher real interest rates amidst global yield normalization. We expect the NBH to stick to its dovish assessment based on domestic factors but the rising pressure on the currency may force the MPC to change its stance, unless external factors turn more supportive. In our view defensive rate hikes may only follow after a number of failed governments paper auctions and accelerated outflows from local bonds and domestic savings.

"In the absence of larger capital outflows the MPC may tolerate FX weakness as Hungary’s large external surplus suggests that these are likely to be short lived. As households remain sensitive to FX (household FX debt ~15% of GDP) we believe there may be political pressure on the NBH to support the HUF in case of excess weakening ahead of the Apr 6 elections. Recent comments suggest that the MPC may be late to act, which points towards excess HUF volatility. In the case of accelerated outflows the size of rate hikes may be lower than historical examples given low inflation outlook and Hungary’s stable external surplus."

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