* Hungary's output fall slows in June, big trade surplus
* Czech exports inch up from May, but domestic demand weak
* Data rays of hope but too early to say recovery on track
By Krisztina Than
BUDAPEST, Aug 6 (Reuters) - Hungary's poor output data
showed improvement in June while Czech exports edged up from May
hinting at a possible pickup in foreign demand, although it is
too early to say the region is firmly on the path to recovery.
Eastern Europe's export-led open economies, mainly the
Hungarian and Czech, have been suffering from a collapse in
demand in key export markets, mainly Germany, while domestic
demand has been hit by a credit crunch and falling consumption.
Latest PMI data showed this week that Germany's private
sector contracted at its slowest pace in 11 months in July and
was close to breaking through into growth, which is a promising
sign for the EU's emerging economies. [].
But banks in the region are still reluctant to lend and
consumers are economising because unemployment is stuck at high
levels.
The Czech trade balance <CZFTB=ECI> on Thursday showed its
second biggest ever surplus of 20.43 billion crowns ($1.13
billion) in June, beating market forecasts of 14 billion
[] and reflecting a continued fall in demand for
imports.
Exports inched up by 1.6 percent month-on-month in June
while imports fell 1.5 percent, but in annual terms exports
still dropped 15.1 percent, after a 21.2 percent fall in May.
Imports dropped 19.3 percent in June, mirroring similar
trends in Hungary, where imports in June plunged 29.4 percent
year on year, while exports were still down by 21.3 percent.
"As for the (Czech) exports, vehicles and machinery exports
still fell but at a rate much slower ... than in the previous
two months. This was, after all, already indicated by better
than expected preliminary industry data," said Martin Lobotka
at Ceska Sporitelna.
"Whether this is already the turnaround in a trend or
one-off thing can't be known with certainty at this moment.
However, PMI indices, foreign German orders and general
improvement in sentiment abroad infuse us with hope that the
bottom is near," he added.
Hungary's industrial output <HUIND=ECI> fell by an annual
18.6 percent in June based on unadjusted data, less than in May
when it dropped 22.1 percent, and month-on-month data showed a
rise for the second month running.
"We would need three consecutive months of increase to be
able to say firmly that (this is a turning point), but we
already see that there is also some improvement among various
segments of industry on an annual basis," said Ildiko Miko, a
statistician at the Central Statistics Office.
Hungary's economy, which is suffering from a much deeper
recession than most of its regional peers, is expected to shrink
6.7 percent this year and shed a further 0.9 percent next year.
"The underlying weaknesses in the region will not disappear
overnight. Fragile banking sectors will keep credit conditions
tight, while the spectre of fiscal tightening will weigh on
growth prospects, particularly in Hungary," Capital Economics
said in a recent note.
DIFFERENT STAGES
Reflecting varying prospects for recovery from deep
recession or stagnation this year, central banks across the
region are in different stages of their policy cycles.
Signs of stabilisation on Hungary's financial markets
prompted the central bank to slash rates by 100 basis points
last week but at 8.5 percent its base rate is still the highest
in the EU along with Romania.
In the Czech Republic, signs of an improvement in foreign
demand may be a signal for the central bank to refrain from a
further rate cut at a meeting later on Thursday, analysts said.
"It is another 'green shoot' for the Czech economy, so if we
can believe the situation is improving then the reasons for
monetary easing are declining," said David Marek, chief
economist at Patria Finance.
A small majority of analysts in a Reuters poll predicted the
bank would keep the main repo rate flat at a historic low of 1.5
percent at their meeting on Thursday, while others forecast a 25
basis point reduction.
"The Czech Republic has seen some pick-up in business
confidence in response to Western Europe's car-scrapping
schemes. But this fillip may prove temporary and domestic demand
has continued to weaken," Capital Economics said.
(Reporting by Krisztina Than and Jan Lopatka in Prague;
Editing by Ruth Pitchford)
