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WRAPUP 1-Polish manufacturing slump adds to risks for CEE outlook
September 1, 2015 / 11:22 AM / 2 years ago

WRAPUP 1-Polish manufacturing slump adds to risks for CEE outlook

(Combines stories, adds quotes, details)

* Czech PMI robust at 56.6, Hungary's slightly up to 50.7

* Polish PMI at 11-month low of 51.1

* Posts sharpest monthly fall in more than decade

* Fall most likely one-off due to power cuts - economist

By Marcin Goettig

WARSAW, Sept 1 (Reuters) - Surveys of manufacturing activity in central Europe painted a mixed picture on Tuesday, with a strong Czech reading and further weakness in Hungary accompanied by a plunge in Poland that economists largely dismissed as a blip.

The fall in Poland's manufacturing purchasing managers' index (PMI) to 51.1 from 54.5 in July was the sharpest monthly drop in more than a decade.

Although economists said it was likely to prove a one-off due to power cuts, it nearly extinguished growth in factory output a month after Hungary suffered a similarly steep decline.

Manufacturing performance continued to be robust in the Czech Republic, however, supporting hopes that Europe's emerging eastern economies, most of whose exports go to the euro zone, can withstand a slowdown in China.

The Czech PMI eased to 56.6 in August from July's four-year high of 57.5, data compiled by Markit Economics showed -- well above the 50 mark separating growth from contraction.

"Right now we have a period where everything is very positive," said Karel Havlicek, chief executive at Sindat Group, which invests in chemicals and the textile sector.

"We are pleased with the central bank policy, keeping the crown at around 27 to the euro is an advantage for exports, (while) interest rates are extremely low -- that supports investment growth -- (and) structural funds are running."

In Hungary, where the manufacturing PMI is calculated under a different methodology, the index climbed to 50.7 in August from a revised 49.9 in July, helped by an increase in the sub-index for new orders.

Activity had declined by nearly 5 points in July. Analysts say Hungarian PMI readings have been volatile in the past, however, and are not as reliable a predictor of actual economic performance as in the Czech Republic and Poland.

"Looking at the details, we can spot one factor to watch that can cause worries. The export index indicates shrinking demand in our foreign markets," said Gergely Urmossy, analyst at Erste Bank in Budapest.

POLISH POWER CUTS

ING Bank Slaski economist Jakub Rybacki said the tumble in Poland's manufacturing PMI was "a one-off, which will not be repeated next month".

A heatwave forced Poland to sharply cut electricity supply to industry for the first time in over a decade in August, forcing companies to limit production.

"However, returning to levels around 54.5 may be difficult and will depend on how Germany reacts to the slowdown in China," Rybacki added.

Poland, with a GDP of $535 billion, accounts for roughly 40 percent of annual output in the EU's eastern wing. It is less dependent on exports than its neighbours, however, with foreign trade contributing around 40 percent of GDP versus 50-60 percent for other economies in the region.

The fall in its PMI reading last month was the sharpest monthly decline since January 2005, with output, new orders and exports all decelerating rapidly. Markit said firms cut purchasing activity and that backlogs of work fell in August. Employment increased, but at a slower pace.

Last month's power cuts prompted the Polish unit of ArcelorMittal to start a standstill of some of installations, while chemical group Azoty said it had been forced to cut production at one of its units by about 10 percent.

Some experts have warned of further power outages in the winter if Poland does not get sufficient rainfall to raise water levels in rivers. That could pose a threat to growth.

Any impact on Germany's economy from a slowdown in China, intensifying fears of which have roiled global financial markets in recent weeks, could post another risk, as Germany is the biggest market for central and eastern European exporters.

But this indirect impact on the region is likely to be limited and take effect with a delay, economists say. (Additional reporting by Robert Muller in PRAGUE and Sandor Peto in BUDAPEST; Editing by Catherine Evans)

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