CEE factory output defies headwinds from China, Fed

[November 02, 2015]  By Marcin Goettig and Sandor Peto

WARSAW (Reuters) - Manufacturing in Central and eastern Europe kept up a robust pace in October despite China's slowdown and U.S. interest rate worries, data showed on Monday, with a rebound in Poland and strong Czech and Hungarian readings.

Poland's manufacturing sector beat forecasts to expand at the fastest rate in three months in October. Firms added jobs and output and new orders sped up, just as an election swept conservative Law and Justice (PiS) to victory.

The Polish manufacturing PMI rose to 52.2 last month from 50.9 in September, data compiled by Markit showed, moving further above the 50-point line separating expansions in activity from contractions. Analysts polled by Reuters had expected the index to rise to 51.5.

The Czech manufacturing PMI reading dropped to a still strong reading of 54.0 in October from 55.5 in September, data compiled by Markit showed. It has remained above the 50 point mark since May 2013.

"Regionally the PMIs show CEE as having solid growth foundations into this period of greater uncertainty around China demand and Fed lift off," said Peter Attard Montalto, emerging market economist at Nomura.

The Czech Finance Ministry has raised its growth forecast for 2015 to 4.5 percent from 3.9 percent, partly due to major inflows of EU development funds.

Hungary's Purchasing Managers' Index <HUPMI=ECI>, calculated under a different methodology, dipped to 55.3 in October from 55.8 in September, but the sub-index for output in October was the fourth-highest in that month in 20 years.

"(Hungary's) growth prospects are not bad. We still expect 2.8 percent economic growth for the full year," said Andras Balatoni, a Budapest-based economist at ING.

Central and eastern Europe depends on the euro zone for most of its exports and has benefited from tentative signs of revival there.

PIS VICTORY

Some economists think the conservative PiS could spur growth in the shorter-term through plans to boost budget spending and push for looser monetary policy.

"I still think medium run we can think of PiS as high current growth and low potential growth," said Nomura's Montalto.

"But the full effects may take until 2017 to really be felt. The second half of 2016 could look more positive though if we have some tax loosening, additional expenditure and Swiss franc mortgage conversion having occurred by then," Montalto said, referring to once popular home loans that had become increasing expensive to service.

The party plans to finance higher social spending partly by increasing tax collection from large multinationals and new taxes on banks and supermarkets, both sectors dominated by foreign capital.

PiS has said it aimed to raise annual economic growth to 5 percent from the current 3.5 percent through monetary and fiscal stimulus.

"Some of the upside (growth) risks from PiS (policies) is countered by downside risk from, among others, EU and China ... we could be talking about 4.5-5.0 percent for 2017 if they successfully implement their policies," Montalto said.

In a reflection of the potential injection of cash for lower- to medium-income consumers, shares in Poland's largest food wholesale chain Eurocash <EUR.WA> hit a two-year high on Monday.

However, Warsaw's bank index  held near 2-1/2 year lows due to the PiS plans and energy firms stayed near 2-1/2 year lows as investors feared the new government would pursue consolidation of unprofitable coal mines with state-controlled utilities.

(Additional reporting by Jason Hovet in PRAGUE; Writing by Marcin Goettig; Editing by Ruth Pitchford)

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