By Michael Winfrey
PRAGUE, Oct 1 (Reuters) - Manufacturing woes in emerging
central Europe's two biggest economies are deepening, data
showed on Wednesday, highlighting Poland's complicated path to
euro zone entry and paving the way for Czech interest rate cuts.
The Purchasing Managers' Index (PMI), a composite indicator
designed to give a snapshot of manufacturing performance,
contracted in Poland for the fifth month running to 44.9, from
45.8 a month earlier. Czech PMI fell to its lowest since the
series began in 2001 to 46.5, from 47.3 in August.
For the Czechs, it was the first time the figure had been
below 50 for three months running -- each showing a contraction
from the previous month -- said Markit Economics and ABN Amro,
who released the data.
Czech output dipped slightly from the previous month to
46.9, while new orders, an indication of future production, fell
to an all-time low of 42.8.
The impact of the euro zone slowdown and a strong Czech
crown has pummelled the export-driven economy's growth, concerns
cited by the central bank when it cut interest rates to 3.5
percent last month.
Inflation is due to drop from around 6.5 percent now to
under 3 percent next year, and analysts said policymakers had a
strong argument to cut interest rates again this year.
"The PMI supports well our scenario of a further slowdown of
the Czech economy and supports expectations that the CNB will
cut rates at its November meeting," said Radomir Jac, chief
analyst at Generali PPF Asset Management.
The Czech crown and Polish zloty, influenced more in recent
weeks by global financial turmoil, did not react to the data.
The crown <EURCZK=> was flat from Tuesday's close at 24.533
per euro. Despite declines last month, it is up 7.4 percent on
the euro since January -- a level producers say hurts exports,
particularly when combined with lower euro zone demand.
The zloty <EURPLN=> has appreciated 6.2 percent in that time
and was at 3.377 per euro, up 0.27 from Tuesday.
POLAND AND THE EURO
Some analysts said the data belied unexpected risks in
Poland because they had expected it to hold up better against
falling export orders due to its large internal market.
At 43.0, Poland's new orders index showed the sharpest rate
of contraction since 2001, and firms reported increasing caution
amongst customers amid signs of weaker demand.
As with its southern neighbour, the Poles saw the rate at
which jobs are shed gather pace, with the employment index
falling to 45.2, its lowest level since January 2003.
While that may boost the position of Polish central bank
doves, analysts said those favouring tightening have the upper
hand in light of the need to tackle high inflation and aid the
government's 2012 euro zone entry plans.
Growth is expected to slow to 5.5 percent this year from 6.7
in 2007, but inflation hit 4.8 percent in August and most
analysts in a Reuters poll early last month said the central
bank will hike at least once more this year, likely in October.
"I don't think there's that space or scope for cuts in
Poland, especially if they are planning to target euro
adoption," said economist Neil Shearing from Capital Economics.
"That's the key thing. That's really going to tie the policy
makers into getting inflation back to target very quickly."
On Wednesday, central bank Governor Slawomir Skrzypek said
Poland may need "more restrictive monetary policy or a slightly
slower easing" due to the 2012 euro plan.
But Poland still faces a number of hurdles, not least of
which are a go-slow approach from the conservative opposition,
backed by President Lech Kaczynski, and the expected need to
amend its constitution for the switchover to take place.
(Additional reporting by Warsaw and Prague bureaus; editing by
Patrick Graham)
