* Polish manufacturing sector contracts for third straight
month below crucial 50 point level, worst since December 2002.
* Czech manufacturing falls below the 50 point level for the
first time in almost six years.
* Both countries affected by record strength in currencies
and low external demand.
By Michael Winfrey
PRAGUE, Aug 1 (Reuters) - Record strong currencies and
vanishing Western demand stunned emerging Europe's producers in
July, cutting manufacturing to around six-year lows in two of
the region's biggest economies and speeding a slowdown.
Mirroring a drop in euro zone manufacturing, Poland dropped
deeper into negative territory for the third straight month and
the Czechs saw their first slip below 50, which indicates a
month-on-month contraction, since 2003, data showed on Friday.
The RBS/Markit Polish Purchasing Managers Index survey
<PLPMI=ECI> fell to 46.4, from 47.9 a month earlier, the worst
result since December 2002 []. The
seasonally-adjusted output index dived to a 67-month low of
46.2.
Poland's seasonally adjusted New Export Orders Index hit
42.6, its lowest in the ten-year survey history.
Czech PMI <CZPMI=ECI> fell to 49.9, the first fall below the
break-even point since February 2003 [].
The main culprits were the drop in demand for East European
exports in the euro zone, the region's biggest customer, and
record performance of the Czech crown and Polish zloty, which
hit all time highs against the euro in July.
"Polish manufacturers look to be suffering the most in the
region from weakening external demand and strong currency
appreciation," Debbie Orgill, senior economist at ABN Amro,
which released the data, said in a statement.
"We believe this reflects the speed of the move in the
currency over the past 18 months."
Due to the surge in global commodities prices and buoyant
consumer demand at home, Polish and Czech central bankers have
raised the cost of borrowing since last year to fight inflation.
But expectations of higher rates emboldened investors who,
enthusiastic about the region's strong growth prospects and
solid economic fundamentals, poured into Polish and Czech
currencies, driving them to all time highs this month.
The zloty <EURPLN=> has appreciated 10.8 percent this year
and is up around 33 percent since Poland, the biggest economy in
ex-communist central Europe, joined the European Union in 2004.
The neighbouring Czech crown <EURCZK=> has firmed 9.7
percent and 26 percent, respectively.
The currency strength has exacerbated a downshift in Western
Europe that is worsened still by higher energy and input costs.
Producers in both states fear they are being priced out of
competitiveness, and growth is slowing. The Czechs have cut
their 2008 outlook to 4.6 percent, from 4.9.
Poland sees full-year growth of 5.5 percent, versus 6.1 in
the first quarter, and analysts said the country's nascent
domestic economy could help alleviate waning external demand.
"It suggests difficult a future for the Polish companies,
but we may still expect private consumption, fuelled by wage and
credit growth, to drive the economy forward," said Maja Gettig,
an economist at bank BPH.
PRODUCTION PLUNGE
Parallel data on Friday showed euro zone factories put in
their worst performance in over five years in July, falling to
47.4, from 49.2 in June [].
Markit Economics said the Czech contraction was negligible,
with only output and employment worsening.
New business increased in July, although the rate was the
weakest since October 2002, and new export business declined for
the first time in over three years. Again, the strong currency
was to blame, according to Orgill.
She said warnings from the Czech central bank that it could
loosen monetary policy to prevent the strong crown from causing
inflation to undershoot the bank's 3 percent target had already
caused the unit to weaken, but persistent inflation meant rate
cuts were unlikely.
"We expect this softer trend to continue into the months
ahead, although hints at early interest rate cuts have halted
the rise in the currency for the time being," Orgill said,
referring to pinched manufacturing.
"However, given the survey still indicates elevated price
pressures, we feel scope for early interest rate cuts is still
limited."
(Additional reporting by Mirka Krufova and Gabriela Baczynska;
Editing by Victoria Main)
