Central European currencies firmed on Monday in a positive correction after a week of losses, aided by fresh PMI data showing a slight improvement in economic activity in August across the region after a dip in July. However, worries over the global economy, US-China trade tensions and the threat of a disorderly exit by Britain from the European Union continue to weigh on investor sentiment, and could also dent the region's economic prospects, analysts said.
Growth is expected to slow in the remainder of the year and next year in Central Europe, which has produced very strong expansion in the past years, well outpacing the euro zone. "The improvement in PMI only means that the activity was shrinking at a slower pace...This is not a signal of an acceleration in the economy," said Piotr Bielski, the head of economic analysis department at Santander Bank Polska.
"This doesn't change (the fact) that rising global trade war tensions and a slowdown in other European countries will keep on affecting Polish companies." Hungary's seasonally adjusted Purchasing Managers' Index rose to 52.6 in August from a revised 51.2 in July, while the Polish IHS Markit purchasing managers' index for manufacturing rose to 48.8 from 47.4 in July, remaining below the 50.0 level that separates growth from contraction.
The Czech headline PMI reading improved to 44.9 in August from a 10-year low of 43.1 in July, data compiled by IHS Markit showed. The Hungarian forint, which hit a record-low of 331.85 last Thursday, edged up 0.14% to 330.92 per euro, while the Polish zloty was 0.27% stronger on Monday from Friday's levels.
David Nemeth, an analyst at K&H Bank in Budapest, said growth in the region was expected to slow in the rest of 2019 and next year gradually, but "not tragically." This was a base case scenario. However, if there is a hard Brexit, or the global trade war worsens significantly, that could shave more off Central Europe's GDP growth, he said.
"Today's PMI data I would say is neutral," Nemeth said. "The Hungarian data is very much influenced by the fact that there are big construction projects underway, and EU-funded and other investment projects, which bring some impetus." The Czech crown was also marginally firmer, rising 0.2% versus the euro in early trade.
"Signals from domestic industry give the central bank an argument for maintaining its wait-and-see attitude with stable interest rates for the remainder of this year," Radomir Jac, CEE chief economist at Generali Investments said. Data on Friday showed Poland's economy expanded by 4.5% year-on-year last quarter and the Czech Republic's by 2.7%, both faster than flash estimates, giving comfort to a region where domestic demand is a key growth driver as the euro zone slows and key trade partner Germany flirts with recession. Hungary's economy expanded by 4.9% in the second quarter year on year.
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