May 2, 2012 / 8:59 AM / 5 years ago

East EU manufacturing slips, euro zone a drag

A factory of German chemical company BASF is pictured in Ludwigshafen February 24, 2012.Alex Domanski

PRAGUE (Reuters) - Manufacturing in the European Union's emerging east contracted in April, following a faster-than-expected drop in its main target markets in the euro zone and painting a grim picture for economies which hope exports will keep growth going this year.

While factories in the United States are pumping out goods at their strongest rate in almost a year and a slowdown in China looks to have bottomed out, austerity and the debt crisis in the euro zone has hammered external demand for emerging EU states.

For Czechs and Hungarians companies, whose exports account for over 80 percent of domestic output, that slowdown puts pressure on policymakers looking for a counterbalance to budget cuts that are expected to keep growth stagnant this year at best.

Poland, the region's biggest economy and an EU growth leader, also needs solid export performance as its government targets a lower budget deficit, and analysts said the data could potentially forestall a rate hike by the central bank in the near term.

Poland's Purchasing Managers' Index (PMI) eased to 49.2 points, sliding under the 50 point barrier that marks the difference between expansion and contraction for the first time since December and worse than analysts' expectations of 49.5.

Czech PMI fell to 49.7, its first time under the break-even level since January. Prompted by a fall in new orders, it was the third largest drop in more than three years.

"What we have seen so far is that Poland has defied the trend in the region - that the economy has been holding up - but we always foresaw that consumption, which has been the pillar of economic growth as well as production, would come down as well," said Commerzbank strategist Thu Lan Nguyen.

"For the Czechs we have already seen the downtrend there mostly due to the recession in the euro zone. And we foresee the overall growth rate (there) in 2012 to be below zero."

Calculated under a different methodology, Hungarian PMI fell to 46.9, its lowest level since August 2009, from a revised 56.8, which analysts dismissed as an outlier.

"In Germany the purchasing manager indices do not look so good, and the Hungarian (April) figure fits into this. So I think it was the March figure which was misleading, that was a one-off," said Zoltan Arokszallasi at Erste Bank.

The region's currencies were little changed following the data.


With debate raging in the euro zone over whether austerity is exacerbating the debt crisis rather than helping solve it, the EU's eastern members hope foreign demand will prop up their economies enough to allow them to push forward with their own budget retrenchment.

The Czech government far overshot its budget consolidation targets last year, hammering domestic demand and investment, and making the country the first outside the euro zone to slip back into a double dip recession in the second half of last year.

That happened despite record exports - a sector driven by the production of cars, electronics and other mainly consumer products - indicating any slide in euro zone demand now will depress what is the only engine of growth.

Finance Minister Miroslav Kalousek, who has impressed markets with billions of dollars in cuts and tax hikes but caused many economists to question the pace of his austerity drive, has said the country will be lucky to avoid a contraction for all of this year.

"Leading indicators signal the Czech economic performance should soften further during the second quarter as the slowdown in foreign demand will add to already weak domestic demand," Vojtech Benda, senior economist at ING Commercial banking.

Poland's 38 million strong consumer market is expected to keep growth at 2.5 percent this year, according to government forecasts, well above that of most EU countries.

But the low PMI result followed very disappointing industrial output data in March and could temper rising expectations among analysts that the central bank could consider hiking interest rates at a meeting next week.

"The data shows that disappointing March industrial output figures were not a one-off and we should expect similar tendencies in the coming months," said Marta Petka-Zagajewska, senior economist at Raiffeisen Bank Polska.

Additional Reporting by Jason Hovet in Prague, Dagmara Leskowicz in Warsaw and Krisztina Than in Budapest; editing by Patrick Graham

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