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CEE manufacturing powers ahead as euro zone strengthens

04/01/2015 | 06:40am US/Eastern

Manufacturing activity in central Europe expanded strongly in March thanks to the region's close ties to the reviving euro zone - as well as to it avoiding excessive currency gains by keeping monetary policy loose.

In the export-reliant Czech Republic, the Purchasing Managers' Index for manufacturing rose to 56.1 from February's 55.6, boosted by new orders and employment, data compiled by Markit Economics showed on Wednesday.

The index has held above the 50 mark denoting growth since May 2013.

Demand from the euro zone accounts for about 62 percent of Czech exports, and the common currency area has shown robust signs of revival in recent weeks thanks to a weaker euro and massive monetary stimulus from the European Central Bank.

Central Europe's deep trade and banking ties to the euro area made the region a pariah for investors at the peak of the euro zone debt crisis in 2010. Now it is reaping the rewards of those same ties.

Loose monetary conditions in the Czech Republic have prevented its crown currency from appreciating against the euro, which helped exports.

The Czech central bank imposed a cap on the strength of the crown <EURCZK=> in 2013, ensuring that no matter how much the euro weakens it will not cost less than about 27 crowns.

HUNGARY AND POLAND

Hungary's PMI, compiled using a different methodology, rose to 55.6 in March from 55.0 in February, benefiting from a pick-up in new orders and production volumes, the Association of Logistics, Purchasing and Inventory Management said.

Part of the acceleration in Hungarian manufacturing in March was due to Japan's Suzuki starting production of its Vitara model at its Hungarian plant last month.

Suzuki has said it plans to supply Hungary-made Vitaras to 70 countries, and its investment to expand its Hungarian plant has reached 150-160 million euros.

About 57 percent of Hungary's exports go to the euro zone.

"The good PMI figures signal that the German economic pickup drives the whole CEE region higher," said Gergely Suppan, a Takarekbank analyst, adding that he expects the economy to grow by 3.2 percent this year with upside risks.

In Poland, the region's biggest economy, the manufacturing PMI eased slightly to 54.1 last month, but employment increased at one of the fastest levels since 1998, data compiled by Markit and HSBC showed.

The euro zone accounts for 54 percent of Poland's exports. Eighty percent of the country's total exports go to other European Union countries.

"Manufacturing PMIs remaining around the 55 threshold suggest very sound growth in the Polish, Czech and Hungarian industrial sectors in the months to come," said Michal Dybula, central European economist at BNP Paribas.

Markit said that the weakening of the Polish zloty against the U.S. dollar has helped Polish exporters, with the subindex for new export orders showing an acceleration in demand.

The Polish zloty, although at two-year highs against the euro <EURPLN=>, has lost 20 percent of its value against the dollar <EUR=> since July last year.

(Additional reporting by Jason Hovet and Robert Muller in PRAGUE and Marton Dunai and Krisztina Than in BUDAPEST; Writing by Marcin Goettig; Editing by Hugh Lawson)

By Marcin Goettig

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