EEC ECONOMY-Manufacturing recovery in Central Europe slows, Polish inflation accelerates

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Band Jason Hovet

October 1 (Reuters)Manufacturing recoveries in the Czech Republic and Poland slowed in September at the fastest pace since sentiment reached record highs this year, surveys showed Friday, as global shortages and rising costs slashed businesses from Central Europe.

The region’s recovery accelerated in the second quarter as the hospitality and service sectors resumed operations after the coronavirus restrictions were lifted.

But gross domestic product growth is expected to be slower in the third quarter and beyond, with supply chain disruptions and pressures on input price growth that companies hope to peak.

Consumers are also facing one of the highest inflation in the European Union, leading to interest rate hikes in the Czech Republic and Hungary since June, including the Czech central bank’s biggest hike in 24 years Thursday.

Analysts are seeing a growing chance that Poland’s central bank will follow suit this year, with September inflation well above expectations at 5.8%, preliminary data shows.

Manufacturing surveys on Friday showed that supply and price constraints continue to put pressure on businesses, adding to headaches such as tight labor markets that push wages up.

Analysts said the rate of cost growth, however, slowed in the September surveys, hinting that a peak may have been exceeded.

In Poland, the IHS Markit Purchasing Managers Index (PMI) fell to 53.4 in September from 56.0 in August, remaining above the 50 mark between growth and contraction, but at its lowest since February.

“Polish manufacturers have signaled that growth in customer demand has slowed down and hinted that the industry is heading into a period of feared stagflation,” said Paul Smith, chief economic officer of IHS Markit.

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Despite the constraints, sentiment remains strong, according to PMI surveys. While Markit’s PMI for the Czech Republic fell three points to its lowest level in six months, it was still at a high 58.0. The companies there said that demand was maintained.

The Czech and Polish surveys reached record levels in June.

Hungary’s PMI, released by the Logistics, Purchasing and Inventory Management Association (MLBKT) on Friday, fell to 52.1 in September from 55.6 in August.

Supply shortages hampering growth are particularly visible with the global shortage of chips in the important auto manufacturing industry.

In September, Toyota’s Czech plant faced a temporary shutdown, while the country’s largest exporter, Volkswagen Group’s Skoda Auto, idled production plants all week.

Skoda said it expects its supply situation to improve by the end of the year.

Radomir Jac, chief economist at Generali Investments CEE, said Czech industrial growth could pick up another 11.5% in 2021 after falling more than 7% in 2020.

“But the complications on the side of the deliveries of raw materials and spare parts pose a risk in the direction of a growth of industrial production weaker than expected”, he added.

(Reporting by Jason Hovet, Alicja Ptak in Warsaw and Krisztina Than in Budapest; editing by John Stonestreet and Alexander Smith)

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