July 1, 2013 / 10:24 AM / 6 years ago

Emerging Europe's factories doing better amid economic gloom

PRAGUE (Reuters) - Business conditions in central and eastern Europe improved in June, propped up by rising new orders, but economists said more signs of revival were needed to see whether the region’s economic downturn has bottomed out.

Employees work at a dairy plant in Litovel, one of the world's biggest producer of traditionally made parmesan cheese, June 27, 2012. REUTERS/Petr Josek

Facing pressures from the slump in their main export market, the euro zone, and at home from falling domestic demand, emerging Europe’s economies are battling weak growth and falling inflation.

In the Czech Republic, which has been hit by the deepest recession in the region, having shrunk for six consecutive quarters, the purchasing managers’ index (PMI) rose to 51.0 in June from May’s 50.1, the best result since March 2012.

Output also rose and new orders increased for the first time in four months.

In neighboring Poland, which has so far avoided the recession that has hit the rest of the region, the PMI rose to 49.3 points from 48.0 points previously, the highest in 11 months although still in contractionary territory.

“The picture is mixed,” said Daniel Hewitt from Barclays Bank.

The Czech Republic’s PMI has been rising for four months, indicating the economic contraction could have bottomed out but hard data from the economy have been weak.

The statistics bureau unexpectedly revised down first quarter gross domestic product (GDP) data last week saying the export-reliant economy shrank by a quarterly 1.3 percent, rather than 1.1 percent seen earlier.

Government austerity and ebbing demand for industrial goods, such as Skoda cars (VOWG_p.DE), have weighed on Czech growth.

Moribund consumption has pushed inflation below the central bank target, prompting the bank to cut borrowing costs to near zero and threaten to knock the crown weaker to pull prices up. Last week the bank board agreed interventions against the currency now looked more likely.

In Hungary, where the seasonally-adjusted index is compiled under a different methodology, manufacturing activity expanded in June.

However, the central bank there is expected to continue its policy easing cycle given inflation is near 38-year lows around 2 percent and the economy still crawling out of recession.

“The Hungary (PMI) bounces around all over the place, and Poland has increased for a couple of months but remains below 50 and it’s not so clear what’s going on there,” Hewitt said.

The entire region is highly dependent on the euro zone and mainly Germany, where factory activity contracted at a faster pace in June, suggesting Europe’s largest economy is struggling to pick up pace after a weak first quarter.

Reporting by Jana Mlcochova; Editing by Toby Chopra

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