Bloomberg News

Czech Manufacturing Worst in 33 Months May Aid Rate Cut Call

June 01, 2012

Czech (CZGDPSAQ) manufacturing performed the worst in 33 months in May on the fastest decline in new orders in almost three years, adding to arguments for lower interest rates.

The HSBC Czech Republic Manufacturing PMI fell to 47.6, the lowest since August 2009, from 49.7 in April, the bank said today in an e-mailed report. A result greater than 50 signals improvement in manufacturing performance, while a figure below shows a worsening. Two central bank board members, including Governor Miroslav Singer, voted for a rate cut on May 3, seeking the first policy change in two years.

Gross domestic product unexpectedly fell 1 percent in the first three months of 2012 from the final quarter of 2011, preliminary data showed, as the state cut spending to narrow the fiscal deficit to less than the European Union’s limit of 3 percent of GDP next year. The economy relies on demand for cars, auto parts and electronics goods from the EU, which buys about 80 percent of Czech exports.

“It is hard to beat the bad news conveyed by a much deeper than expected GDP contraction in the first quarter of this year and in this sense, the weakening PMI comes as no surprise,” Agata Urbanska, an economist at HSBC Bank Plc in London, said in the release. “But the PMI index still points to downside risks in the coming quarters.”

The Ceska Narodni Banka has left the benchmark two-week repurchase rate unchanged at a record-low 0.75 percent since May 2010 as inflation accelerated on higher sale tax and fuel costs. The possible impact of government austerity measures, including a further increase in taxes, has split the seven-member board, with four voting for stable rates on May 3 and one policy maker requesting a quarter-point increase.

The koruna weakened 0.1 percent to 25.787 against the euro as of 10:30 a.m. in Prague.

Government austerity policies, combined with an unemployment rate exceeding 8 percent, are curtailing consumer demand. Retail sales fell 0.3 percent in March, while consumer sentiment dropped to minus 31 in May. Industrial output eased 0.7 percent in March, the first decline since November 2009.

“All in all, the PMI survey and other data from Czech industry are painting a rather gloomy picture for industrial performance in the second quarter of 2012,” Radomir Jac, chief economist at Generali PPF Asset Management in Prague, said in an e-mail. “Data from the Czech economy are supportive of expectations of an interest rate cut.”

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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