By Michael Winfrey
PRAGUE, Jan 2 (Reuters) - Emerging European manufacturing
plunged to new lows in December, prompting economists to say the
Czechs could follow the reeling euro zone into recession and
adding to the case for more cuts in interest rates soon.
Once thought to be relatively insulated from the global
economic crisis due to a low exposure to toxic U.S. debt and
absence of asset bubbles, ex-communist European Union members
have taken a beating since September.
Since then, investors have dumped assets and evaporating
demand in the euro zone -- the main export market for the
Czechs, Poles and Hungarians -- has forced governments to slash
growth forecasts and central banks to lower interest rates.
The Czech Purchasing Managers' Index (PMI) dropped to 32.7
in December, from 37.8 in November, falling below the critical
50.0 mark for the sixth consecutive month, Markit Economics and
ABN Amro said on Friday.
Poland's dropped to 38.3 in December from 40.5 in November,
its lowest level since the series began in June 1998 and the
eighth month running of contraction in the sector.
Czech output dropped to a new historic low of 27.4 for the
fastest contraction in any period since the survey began in
July, 2001. Markit said the overall decline in business
conditions was the worst in the survey's history, and anecdotal
evidence linked it to worsening domestic and export demand.
Poland's output fell sharply to 36.3 from 40.2 in November.
"The Czech Republic is likely to experience, in the best
case, a not to deep recession, but a recession this year... a
contraction in economic growth," said Miroslav Plojhar, an
analyst at JP Morgan.
The Polish zloty <EURPLN=> shed more than 1 percent in thin
New Year trade. The Czech crown <EURCZK=> was up a touch from
Wednesday's late levels, but dealers said trade was shallow.
POLISH INFLATION SLOWS
In Poland, the Finance Ministry said annual consumer price
growth likely slowed to 3.4 percent in December, falling to
within the central bank's target range for the first time since
October, 2007.
Rate-setter Marian Noga, who supported raising the cost of
borrowing last year, said the bank's Monetary Policy Council
could follow up on a bigger than expected 75 basis point rate
cut last month with further easing this month.
"We're in an easing cycle, thus a January rate cut cannot be
ruled out. There is room for a rate cut in January, February or
March, or even in all of these months," Noga, who supported the
bank's rate hikes last year, told TVN CNBC.
Poland's central bank had resisted following its central
European peers and other major global central banks by lowering
the cost of borrowing. But it has cut by a percentage point,
bringing its main rate to 5 percent, since November.
By comparison, the Czechs have slashed rates by one and a
half points to 2.25 percent and the Hungarians by the same to
10.0 percent after a 300 basis point hike in October aimed at
halting investor flight that was hammering the forint currency.
More cuts are expected in the first quarter as growth slows,
taking pressure off policymakers who just six months ago were
still fighting what they feared could be a spike in inflation.
Although the Czechs still expect growth of at least 2
percent in 2009, versus 5.7 percent in 2007, most analysts say
that is optimistic. The central bank sees price growth dropping
from 4.4 percent now to a mid-range of 2 percent next year.
Poland's government forecasts growth of 3.7 percent in 2009,
but Noga said it would be 3 percent, and other policymakers and
economists have said it could be even lower.
"If the output dynamics confirms this trend then we can
expect that the GDP growth won't top 3 percent in the fourth
quarter," said Piotr Bujak, an economist at Bank Zachodni WBK in
Warsaw.
