October 1, 2014 / 10:39 AM / in 3 years

Polish factory contraction slows amid improvement in Central European PMIs

BUDAPEST (Reuters) - Manufacturers in the Czech Republic and Poland are doing better than expected, surveys showed on Wednesday, but activity in the region’s largest economy still contracted, cementing expectations for a reduction in Polish interest rates next week.

Low inflation and an economic slowdown have encouraged some of the region’s central banks to further cut interest rates already at record lows and launch measures to stimulate growth in the face of weaker European activity and the Russia-Ukraine crisis.

While a longer-term recovery remains on track, central Europe’s economies are feeling the pinch from weakness in their main export markets and “the underlying cycle around the euro zone is unambiguously weakening,” Commerzbank said in a note.

Poland, central Europe’s biggest economy, is highly exposed to a sanctions conflict between the European Union and Russia over the latter’s intervention in Ukraine. However, activity in Polish factories contracted at the slowest pace in three months in September.

The manufacturing PMI rose to 49.5 last month from 49.0 in August, data compiled by Markit and HSBC showed. Although still below the 50-mark which separates growth from contraction, analysts polled by Reuters had expected the PMI to fall further to 48.7.

Polish interest rates are among the highest in Europe with a base rate of 2.50 percent, above “junk”-rated Hungary’s own 2.1 percent reached in July after an aggressive two-year monetary easing campaign to boost the indebted economy.

“In Poland the negative impact of economic sanctions against Russia could be much bigger (than in Hungary), because they export significantly more to Russia,” said analyst Gergely Gabler at Erste Bank in Budapest.

Polish central bank policy maker Elzbieta Chojna-Duch told the Reuters Eastern Europe Investment Summit on Monday that excessive rate cuts may discourage saving and stoke asset bubbles, so the central bank should cut rates by 50 basis points in October and later see if more easing was needed.

Romania’s central bank cut its benchmark interest rate to a new record low of 3 percent on Tuesday, as benign inflation gave it room to help an economy that has dipped into recession.

CZECH ACTIVITY ALSO RISES

In the Czech Republic, where official rates are near-zero and the central bank weakened the crown to boost inflation, the PMI unexpectedly rose to 55.6 in September from 54.3 in August, data from Markit Economics showed.

Analysts polled by Reuters had forecast a dip to 53.8 points. The PMI has remained above the 50-point mark denoting growth in activity since May 2013.

“Activity in Czech manufacturing seems to be decoupling from the deceleration of activity in German manufacturing, where activity is close to stagnation according to the PMI survey,” said Radomir Jac, chief analyst, Generali PPF Asset Management.

“The question is how long is this decoupling between the Czech and German manufacturing sustainable,” he said, adding that slower European growth, particularly in export-oriented manufacturing, could still dent Czech activity.

Czech rates are expected to stay near zero until 2016 and the bank has also pledged to keep the currency weak in that time.

Hungary’s seasonally-adjusted Purchasing Managers’ Index rose to 52.6 in September from 51.0 in August, above the long-term average for September and the second highest figure for this month since 2008.

Production volumes rose, while new orders also increased, however, new orders were still below the long-term average measured since 1995.

“The figures are good news, especially given the weaker PMIs in the euro zone and even the German picture hinted at weaker growth in the region,” Erste Bank’s Gabler said, adding however that he still expected Hungarian growth to slow.

“There will be a decline in state investments in the second half and GDP will be also dragged down given the high base a year ago,” he said. “The Russia-Ukraine conflict will also have an impact on Hungarian trends, albeit not very significant.”

Additional reporting by Robert Muller in PRAGUE; Writing by Gergely Szakacs; Editing by Toby Chopra

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