Manufacturing in CEE misses expectations, underlying trend weakening

Manufacturing data for the CEE region that was released yesterday, undershot market expectations. It dropped sharply in sequential terms. This is in sharp contrast with a marked rebound seen in the last month’s PMI readings from the same nations as well as solid German Ifo readings. The latest hard data are expected to pressure consensus growth projections downwards and might make central banks come back to a dovish stance, noted Commerzbank in a research note.

The sequential data, as always, had certain one-off factors that impacted the readings for September. However, the undertone was strong. The reporting nations – Hungary, the Czech Republic and Turkey – considerably missed projections. Output in Hungary and in Czech dropped almost 3 percent sequentially, whereas it was down by almost 4 percent in Turkey.

Headline industrial output growth rose 2.7 percent year-on-year in Czech as compared with consensus expectations of 4 percent, whereas it dropped by 3.7 percent and 3.1 percent in Hungary and Turkey. All the numbers were subject to sharp base effects, particularly in the Czech Republic. Manufacturing in Czech has been through major volatility because of maintenance shutdowns in the auto sector, planned cleverly around the Brexit vote.

Output in the nation slowed in September; however, it dropped only to a level in line with its original trend. However, output in Turkey and Hungary portray a major peak. In Turkey’s case it is not unexpected given the coup attempt in July and the emergency rule that followed. There is restricted demand for capital goods or big-ticket items such as consumer durables.

There were certain one-off factors upsetting manufacturing output in September, but a modest technical rebound is expected to be seen throughout the board in October, said Commerzbank. However, there are certain signs that the underlying trend is softening throughout the CEE region. As the consensus GDP growth outlook for Poland and Hungary have been dropping recently and the central banks have kept their above consensus forecasts unchanged, it raises the questions of how the central banks will adjust policy in the face of the upcoming data, stated Commerzbank.

“We stick with our call that CE3 central banks will turn more dovish next year – NBP and MNB are likely to cut rates (by 50bp and 40bp respectively), while CNB is likely to push back its exit from EUR-CZK targeting”, added Commerzbank.