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WRAPUP 1-Poland's shrinking manufacturing a grim outlier in central Europe
August 1, 2014 / 11:10 AM / 3 years ago

WRAPUP 1-Poland's shrinking manufacturing a grim outlier in central Europe

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* Polish HSBC manufacturing PMI at 13-mth low of 49.4

* Hungary PMI soars to 56.7, highest July reading since 1995

* Czech manufacturing accelerates to 56.5, beats forecast

By Marcin Goettig

WARSAW, Aug 1 (Reuters) - Poland's manufacturing sector, burdened by one of Europe's highest interest rates and strong trade links with Russia, shrank for the first time in 13 months in July, while factory activity roared ahead in the Czech Republic and Hungary.

The Poland manufacturing PMI index (PMI) fell to 49.4 points last month, data from Markit and HSBC showed on Friday, dropping below the 50 reading that separates expansion from contraction. The index had registered 50.3 in June.

The fall contrasted with analysts' forecasts for a slight pick-up and added to signals of a slowdown in growth in central and eastern Europe's largest economy, which accounts for roughly 40 percent of the region's output.

"Central to deteriorating business conditions in the manufacturing sector was a drop in new orders in July," Markit said, while output came close to stagnating.

In contrast, the Czech manufacturing PMI jumped to 56.5 from 54.7, reflecting growth in output, new orders and employment.

Hungary's PMI, calculated under a different methodology, jumped five points from June to 56.7, the highest reading for that month since 1995, the Association of Logistics, Purchasing and Inventory Management said.

Polish Rate Cut?

Poland's economic growth rate is expected by economists to slow to an annual 3.2 percent in the second quarter, but a string of recent weaker-than-expected data suggests that forecast is optimistic.

With the benchmark interest rate at 2.50 percent and deflation of 0.2 percent year-on-year expected by analysts in July, Poland has one of the highest inflation-adjusted interest rates among the world's biggest economies.

In comparison, the Czech benchmark rate stands at 0.05 percent with inflation at zero, and the central bank is intervening to weaken its crown currency.

The key interest rate in Hungary, the region most indebted economy, is at 2.1 percent with deflation at 0.3 percent.

"Such a weak reading of the PMI will strengthen expectations for a rate cut (in Poland) this year," said Agnieszka Decewicz, economist at Bank Zachodni WBK.

The Polish zloty fell to a 2-month low of 4.1935 on Friday, with dealers saying that the PMI figure contributed to the weakness with speculation over higher U.S. interest rates sapping investor appetite for risk.

Bank Zachodni's Decewicz added that the Polish index was also likely impacted by the crisis in Ukraine and sanctions imposed on Russia by the European Union and the United States.

On Wednesday, Russia announced a ban on most fruit and vegetable imports from Poland, which Warsaw called a retaliation for new EU sanctions imposed a day earlier.

Fallout from the tit-for-tat sanctions will shave 0.6 percentage points off Poland's economic growth this year, its Deputy Prime Minister was quoted as saying.

Broader Sanctions Risk

"The new sanctions imposed on Russia by the EU are a risk for production performance as they might backfire on Polish exporters and harm output in the months ahead," said Marcin Kujawski, an economist at BNP Paribas in Warsaw.

But other leading indicators suggested that the situation in Polish manufacturing was somewhat better that shown by the PMI, he added.

Polish exports to Russia fell by 9.4 percent in the first four months of the year.

The fresh sanctions on Russia coupled with potential retaliatory measures from the Kremlin could also harm other central European economies in coming months, said Michal Brozka, chief analyst, Raiffeisenbank in Prague.

"PMI supports expectations of a continuing expansion of the Czech economy," he said. "However there is a substantial risk that ... leading indices in the coming months will be (affected) by sharpening sanctions in the Ukraine conflict." (Writing by Marcin Goettig; Additional reporting by Krisztina Than in BUDAPEST and Jason Hovet in PRAGUE, editing by John Stonestreet)

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