WRAPUP-Czech factory PMI surges, Poland's sinks as Ukraine weighs

Mon Jun 2, 2014 6:09am EDT

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* Polish manufacturing PMI falls to 11-month low

* Firms cite Ukraine crisis as reason for weak orders

* Czech PMI soars to 57.3 points, beats expectations

* Hungary's PMI weakens slightly, but still strong

By Marcin Goettig

WARSAW, June 2 (Reuters) - Polish factory activity slowed unexpectedly in May yet Czech manufacturing grew at its fastest pace in two years, data showed on Monday, underlining Poland's exposure to the Ukraine crisis.

The HSBC Poland manufacturing PMI index (PMI) for Poland fell to 50.8 points last month, an 11-month low, from 52.0 in April and compared to 52.4 expected by economists polled by Reuters.

Readings above 50 point to expansions in activity.

Markit said some firms cited the Russia-Ukraine tensions as a reason for the fall in new export orders, the first such decline in 12 months.

"The Polish manufacturing sector edged closer to stagnation in May," Markit said. "Growth of both output and new orders slowed for the third successive month to weak rates."

Poland, which accounts for around 40 percent of the region's annual output, has emerged as one of the staunchest supporters of Kiev and strongly condemned Russia's annexation of Ukraine's Crimea.

The strength of Poland's zloty currency may also have weighed on exports.

Russia has imposed an ban on Polish pork imports, which Polish officials said was politically motivated. Moscow has also banned imports of products from some Polish milk processing plants.

Analysts at Bank Pekao said the Russia-Ukraine crisis "has increased the uncertainty regarding future demand, which clearly reduced the propensity of firms to further increase employment".

The PMI data painted a much less optimistic outlook for the economy than the first-quarter economic growth data.

"The PMI survey supports our expectations of economic activity consolidating in 2014 with GDP (gross domestic product) growth at just over 3 percent year-on-year," said Agata Urbanska-Giner, CEE economist at HSBC.

DIVERGENCE

Suggesting greater insulation from the Ukraine crisis, the Czech manufacturing PMI rose to 57.3 points in May, its highest level in over 2 years and bucking analyst expectations for the index to fall to 55.4 points.

"In the Czech Republic, unlike Poland, the Russia-Ukraine crisis has had little impact on the society's perception," said Piotr Kalisz, central and eastern Europe economist at Citi's Bank Handlowy.

He added that after an expected slowdown in the Polish economy in the second quarter, it will likely pick up again in the third, narrowing the divergence.

Hungary, which uses a different PMI index released by the Association of Logistics, Purchasing and Inventory Management, reported the index fell slightly to 53.9 in May from 54.6 in April.

Analysts said the data still showed a relatively high level of growth in the country's industrial sector, which saw heavy investment in recent year from such firms as Mercedes or Audi.

"This is a good figure, shows a clear expansion and indicates that industrial output growth will be strong this year," said David Nemeth, an analyst at K&H Bank.

Poland currently has higher interest rates than both the Czech Republic and Hungary.

The Polish central bank has said it would likely keep rates on hold at 2.5 percent until at least September. Its stance has already translated into gains for the Polish zloty, which make Polish exports relatively less competitive.

In turn, the Czech central bank has slashed rates to almost zero and started intervening to weaken the crown currency. (Writing by Marcin Goettig; Additional reporting by Krisztina Than in BUDAPEST and Mirka Krufova in PRAGUE, Editing by Ruth Pitchford; marcin.goettig@thomsonreuters.com; +48226539720; Reuters; Messaging: marcin.goettig.reuters.com@thomsonreuters.net)

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