WSJ:Euro Zone's Woes Continue To Drag Down Emerging Europe
-- PMIs point to declines in Polish, Czech, Turkish manufacturing activity
-- Russian manufacturing activity picks up on domestic demand
-- Further slowing seen as euro-zone crisis rumbles on
(Adds economist's comment in third paragraph, context)
By Veronika Gulyas and Paul Hannon
The euro zone's economic woes continued to take their toll on countries in central Europe and further afield that have close trade and financial links with the currency area.
Surveys of purchasing managers released Wednesday showed Turkish manufacturing activity contracted in July, as did activity in Poland and the Czech Republic. Manufacturing activity continued to increase in Hungary, but at a slower pace, while in Russia the expansion of activity picked up.
"The latest manufacturing PMIs suggest that while industrial output in emerging Europe has not collapsed to the same extent as in the euro-zone, neither is it growing," said Neal Shearing, chief emerging-markets economist at Capital Economics.
PMIs for the euro zone also released Wednesday showed manufacturing activity fell at the sharpest rate for three years, with regional powerhouse Germany slowing sharply. The manufacturing sectors of many central European nations are closely integrated into that of Germany.
The purchasing managers index for Turkey fell to 49.4 from 51.4 in June, indicating that activity contracted for the first time since March.
"A number of panelists reported that weakness in European markets had prevented stronger growth of new export business," said Markit Economics, which compiles the PMI.
In central Europe, the PMIs for Poland and the Czech Republic recorded a slight improvement, but still pointed to a fall in activity. In the Czech Republic, the index edged up to 49.5 in July from 49.4 in June, while Poland's PMI rose to 49.7 from the previous month's 48.0.
A higher-than-expected reading for Czech manufacturing PMI in July bodes well for a gradual recovery in the coming months, Radomir Jac, chief economist at Generali PPF Asset Management, said in a note.
Within the Polish survey, the pickup in employment was a positive surprise, Bank Millennium said. The survey found that manufacturers hired additional workers for the fourth straight month, and at the fastest pace since February 2011.
Less rosy is the outlook for Hungary where the PMI dropped to 51.9 in July from a June reading of 52.8, indicating that while manufacturing activity continued to increase, it did so at a slowing pace.
In addition to its weakening manufacturing sector, Hungary's ailing economy won't get a respite this year from agriculture either. Last year agricultural output increased gross domestic product by around 1%, but severe drought and extreme weather conditions have hurt this year's harvest.
"While the PMIs were generally better than expected, we doubt that they herald an improvement in manufacturing output ahead," said Michael Dybula, central and eastern Europe economist at BNP Paribas.
Russia managed to escape the overall slump thanks mainly to strong domestic demand. The Russian index rose to 52 in July from 51 in June, although staying weaker than the second-quarter average of 52.3.
"It follows from the survey that Russian manufacturing appears to be capable of sustaining low yet positive growth, with the reliance on primarily domestic sources," Alexander Morozov, chief economist for Russia and the Commonwealth of Independent States at HSBC, said.
He added that a very fast rate of inventory reduction shows manufacturers are getting ready for a potential weakening of demand.
The European Bank for Reconstruction and Development last week cuts its 2013 growth forecasts for eight countries in central Europe, having concluded that the euro zone's economy will contract this year and stagnate next. It also lowered its 2012 forecast for Russia, citing the impact of the euro zone's long-running crisis on commodity prices and flows of foreign investment.
"It is difficult to escape the conclusion that regional growth is likely to slow sharply over the coming months and quarters," said Mr. Shearing at Capital Economics. "This will revive calls for policy stimulus, but in reality only Polish policy makers have much room for maneuver."
--Sean Carney in Prague and Patryk Wasilewski in Warsaw contributed to this article.
Write to Veronika Gulyas at veronika.gulyas@dowjones.com
