PRAGUE (Reuters) - Polish manufacturing activity shrank for a second straight month in August and Czech expansion slowed more than expected, adding to signs weaker euro zone economies and crisis in Ukraine are cooling growth in the EU’s east.
Economies in central Europe have rebounded strongly from a sharp slowdown or even contraction in the past year but are starting to slow, and analysts expect that to continue for the rest of the year even while a longer-term recovery stays on track.
In Poland, the region’s largest economy the HSBC manufacturing PMI index (PMI) fell to 49.0 last month, the lowest reading in 15 months, from 49.4 in July, bolstering calls for interest rate cuts.
The Czech PMI fell to 54.3 from 56.5, staying above the breakeven 50 mark dividing expansion from contraction.
Hungary’s seasonally-adjusted PMI, calculated using a different methodology, dropped to 51 from 56.6.
Central Europe’s economies, which share trade links with Russia, are only just beginning to feel the impact of tit-for-tat sanctions between the European Union and Russia over pro-Moscow separatists fighting in Ukraine.
EU leaders have threatened Russia with further trade sanctions. Russian President Vladimir Putin denies his forces are involved.
“The biggest driver on sentiment has been the worsening of the Russia-Ukraine crisis,” said Per Hammarlund, chief emerging markets strategist at SEB. “Obviously the weakness in Germany and the euro zone has also not helped. We are definitely going to see a slowdown in growth (in the coming quarters).”
On top of the crisis in Ukraine, Germany, the region’s top export market, contracted in the second quarter, contributing to Polish growth slowing to 3.3 percent year-on-year.
Analysts said the weak PMI reading will strengthen chances of a cut in Polish interest rates, among the highest in Europe with a base rate of 2.50 percent, in the coming months.
Czech rates are expected to stay near zero until 2016 and the bank has also pledged to keep the currency weak in that time. Helped by revived domestic demand, the economy expanded by 2.7 percent last quarter, although some harder-hit sectors are still feeling pinched.
“We could see some small signals from the second and third quarters that the market is slightly - and I highlight slightly - recovering,” said Jan Rafaj, a board member with steelmaker ArcelorMittal Ostrava in the Czech industrial northeast.
“There are signals the Ukraine crisis can have some negative impact ... We can see that cheap Ukraininan and Russian steel products are coming to the region” after their currencies depreciated, he said.
The company also sources ore from Ukraine and Russia, among other countries.
A Russian ban on many EU food imports came into effect last month and will likely cut into growth somewhat.
Sharp divisions among EU leaders make the timing of new measures against Russia uncertain. Apart from Poland, which has pushed for tougher action, central European countries are wary of sanctions.
Slovak Prime Minister Robert Fico has called them “meaningless and counter-productive” and threatened to veto any new measures that harmed Slovakia’s interests. Austria, Hungary and the Czech Republic are also more cautious.
Hungary paced the region with 3.9 percent annual economic growth in the last quarter, thanks to its car sector. But analysts said that, too, will be pulled down.
“What you see in Hungary is visible around Europe and the region, namely that the geopolitical conflicts have sapped demand in Europe,” said Eszter Gargyan, a Citibank economist.
“This (Hungarian) PMI figure, although it is volatile, still reflects the fact that Hungary too will be unable to break free from the general trend for the longer term.”
Additional reporting by Marton Dunai in Budapest and Marcin Goettig in Warsaw; Editing by Ruth Pitchford