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Friday, February 26, 2010

Too Soon To Cry "Victory" On Latvia?

"Doom-mongers" - the Economist tells us - "are licking their wounds". And why exactly are they licking their wounds? Well for two years now (apparently) they have been telling us that "the struggle to save the lat’s peg to the euro was bound to end in tears". As you could imagine right in the very forefront of these so called doom-mongers is to be found yours very truly (and here), and of course Nobel Economist Paul Krugman (and here).

But while I have never thought of myself as especially adverse to admitting defeat when faced with compelling reasons to do so, just why, we might ask ouselves, should we start to think about licking our wounds right now (and why our wounds, since it is poor old Latvia which has been subjected to all the blood-letting implied by this none-too-convincing "thought experiment" turned reality)?

Well, in the first place, given the dramatic current account correction, Latvia's outlook has been revised from negative to stable by Standard and Poor's rating agency, which means - when you get down to the nitty gritty - that they don't expect any further downward revisions in Latvia's sovereign credit rating in the next six months.

Standard & Poor’s, a rating agency, has raised its outlook on Latvia’s debt from negative to stable (ie, it no longer expects further downgrades). The current account, in deficit to the tune of 27% of GDP in late 2006, is in surplus. Exports are recovering. Interest rates have plunged and debt spreads over German bonds have narrowed (see chart). Fraught negotiations with the IMF and the European Union have kept a €7.5 billion ($10 billion) bail-out on track, in return for spending cuts and tax rises worth a tenth of GDP.
And anyway, Latvia is not as bad as Greece.

Even so, Latvia looks good when compared with Greece. It did not lie about its public finances or use accounting tricks. Strikes have been scanty. Protests are fought in the courts, not the streets. Both Greece and Latvia have had hard knocks, but Greeks became used to a good life that they are loth to give up. Latvians remain glad just to be on the map.
As evidence for just how much better Latvia is doing than Greece the Economist cite the movements in the respective bond spreads, and of course, the extra interest the Greek government has to pay to raise money (with respect to equivalent German bonds) is now marginally more than the extra interest Latvia has to pay, but then Greece has yet to go to the IMF.

But just in case both these arguments seem rather like clutching at straws when compared to the "gravitas" of the situation, there is a "clincher".

"despite a fall in GDP last year of 17.5%, Latvia seems to have achieved
something many thought impossible: an internal devaluation. This meant regaining competitiveness not by currency depreciation but by deep cuts in wages and public spending. In a recent discussion of Greece, Jörg Asmussen, a German minister, praised Latvia for its self-discipline".

Well, I'm sure that having a positive reference from a German minister in a discussion on Greece is a positive sign, but hang on a minute: just what internal devaluation is our author talking about here, and what deep cuts in wages and salaries? According to the latest available data from the Latvian Statistics Office, average wages in Latvia were down 10% in September 2009 over 2008, but since wages in September 2008 were up 6.5% over wages in September 2007, when the Latvian economy was already in deep trouble and wages and prices were already seriously out of line, then they have only actually fallen back some 4.15% over the two year period. I am sure these cuts are painful (a 20% unemployment rate, and young people emigrating is even more painful), but I would hardly call this a "deep cut" yet awhile.

The thing to remember here is the difficult characterists imposed by the presence of a peg. Latvian real wages (when adjusted for inflation) may well have fallen more, but this is to no avail (and simply makes the internal consumption problem worse), since what matters are the Euro equivalent prices of Latvian wages and exports. This is one of the reasons why in these circumstances a peg is such a horrible thing.

And if you're still not very convinced, let's try the Eurostat equivalent data for average hourly wage costs, which had in fact only fallen by 3.5% year on year in the third quarter of 2009.

Why the difference between average wages and average hourly labour costs? Well, given the depth of the recession people are obviously earning less, since they are working less, but this doesn't help overall competitiveness, since what matters here is the hourly cost of each unit of labour. I'm sorry if this is all fairly turgid economic data stuff (yawn, yawn, yawn) but if you want to cry victory, you really do need to check your facts a bit first.

In fact, as I said in my last post, additional evidence from the consumer price index suggests the "internal devaluation" is only working at a hellishly slow pace. Prices were only down by 3.3% in January 2010 over January 2009 according to the latest HICP data from Eurostat.

And while producer prices have fallen a little further - by 6.6% in January over January 2009 - there is still a long long way to go.

Basically there is no doubt that Latvia's great economic fall may be coming to an end, but as I explained in this post here, that is not the same thing at all as resuming growth. To get back to growth Latvia's internal devaluation needs to be driven hard enough and deep enough to generate a sufficient export surplus to drive headline economic growth at a sufficient speed to start creating jobs again. This is not about a fiscal adjustment, it never was, and it is little consolation for Latvia to be compared with Greece and told that they are doing just that little bit better. Cry Victory we are told, and unlease the jobs of war. Would that things were as easy done as said!

Friday, February 12, 2010

Estonia's Economy "Only" Contracts By 9.4% in Q4 2009

Hard on the heals of yesterday's Latvian GDP numbers we now have news that Estonia’s economy shrank at the slowest annual pace in a year at the end of 2009 as a modest recovery in exports and one-time stock-building helped offset the impact of the continuing decline in consumer spending. In fact gross domestic product fell 9.4 percent, which compares with a 15.6 percent drop in the third quarter, and a 16.1 percent decline in the second one. So the recession is evidently easing.

Indeed, startling as it may sound, the economy even grew during the quarter - by a seasonally adjusted 2.6 percent when compared with the third quarter. The news caused some surprise as even the Estonian Finance Ministry had been expecting worse results - an annual contraction of something in the region of 11 to 12 percent. The critical little detail is that the numbers were skewed, since they were affected by a one-off stock- building effect, according to the Finance Ministry, since companies built up their inventories in anticipation of a January tax increase on tobacco, alcohol and motor fuels. As the ministry also added, economic growth will thus see a “negative effect” in the first quarter of 2010 as inventories will inevitably be run down again.

"The alcohol, tobacco and motor fuel excises were applied in the beginning of the year, so the stocks of those products were increased, and that gave a positive move to the GDP in the fourth quarter, but will give a negative influence in the beginning of this year,” according to Andrus Sääsk Head of Macroeconomy at the Ministry of Finance.

No Sign Of Any Real Recovery

So, as we are seeing in the other Baltic States, the recession is gradually winding down, but there is no end to the agony in sight, since structural distortions in the economies produced by the earlier boom will impede any immediate recovery. If we look at retail sales the pattern is similar to what we are seeing elsewhere, and these are now down about 28% from their February 2008 peak.

A similar situation is to be observed in industrial output, which fell back again in December (by a seasonally adjusted 2.2% from November) according to statistics office data. Industrial output is now down 32.5% from the February 2008 peak.

And while exports have picked up slightly from the first quarter 2009 trough, momentum has not been strong enough yet to reverse the deadweight drag of domestic consumption.

The goods trade deficit has improved - indeed the 2009 deficit was the smallest since 1995 - but it is still a deficit, although the country does run a healthy services balance.

And the services balance is what makes the difference in turning the current account deficit into a surplus.

On the other hand unemployment continues to rise, and is the third highest in the European Union (after Latvia and Spain), hitting 15.2% in September - which is the last month for which the Eurostat has data at this point. Indeed statistics regularity and quality is one of the issues which Estonia will need to attend to as part of its general euro ambitions, as the ECB took the trouble to point out recently.

Demographic Issues Also Need To Be Addressed

Estonia's population fell again in 2009 - by 400 - and was estimated by the statistics office to be in the region of 1,340,000 at the end of the year. A falling death rate meant the population decline slowed down over the year, but the number of live births decreased for the first time in eight years (see chart below), raising issues about the longer term impact of the crisis. Some 15,807 live births were registered in total in 2009 - 221 birth less than in 2008.

While the situation is a lot less serious than the one Latvia faces, the downturn in Estonian births is a rather bitter blow for a country where fertility had rebounded substantially from earlier lows, and while the 1.6Tfr was still a long way from population replacement level, the improvement had been a welcome one.

Credit Rating Improvement

Estonia's credit rating outlook was raised this week by Standard & Poor’s, from negative to stable. More than the improvement, what is interesting is the reason given, since the agency cited improving prospects for euro adoption next year. This has both a positive and a negative reading. The positive reading is that S&Ps think Estonia will meet the eurozone membership criteria. The negative one is that the improvement is not due to any underlying change in the country's growth prospects, which are at the end of the day the main area of immediate concern.

Indeed S&Ps have an A- rating, the fourth-lowest investment grade, on Estonia and the move to stable from negative, means the rating is more likely to be left unchanged than raised or lowered. The rating was in fact cut from A last August, and evidently losing the A- rating would give a rather negative signal given that the ECB is about to return to at least one A- as the minimum collateral condition.

“Estonia has stabilized its public finances, which significantly increases its prospects for eurozone accession in 2011,” S&P’s Frankfurt-based Kai Stukenbrock and London-based Frank Gill said in a statement. The “outlook reflects our view of Estonia’s improving economic flexibility and the prospect of near-term eurozone accession against the challenges inherent in adapting the economy to lessen its reliance on external funds.”

Fitch currently has a BBB+ rating on Estonia, and the outlook on this was also raised to stable from negative on February 5. Moody’s Investors Service has an A1 rating on Estonia with a negative outlook.

Euro adoption terms require countries to maintain fiscal deficits below 3 percent of GDP, limit debt to 60 percent of GDP and ensure inflation isn’t more than 1.5 percentage points above the Eurozone average, and Estonia has met all the criteria, according to Prime Minister Ansip speaking yesterday. Whether Ansip's optimism is totally justified or not the EU Commission and the European Central Bank will publish their report assessing Estonia’s readiness to join sometime in May, and (assuming this is favourable) the Ecofin council of EU finance ministers will take the critical decision on entry on June 8.

But as Fitch pointed out when they raised their Estonia outlook, while eurozone membership looks increasingly possible it is not yet certain. Fitch warned in their report that even if Estonia meat all the formal Maastricht reference criteria for euro entry there is still a risk that the European authorities' interpretation of these same criteria could lead them to reject Estonia's application. According to Fitch, in Estonia's case uncertainty surrounded whether the idea of "sustainable price performance" was going to be consistent with the deflation which is to be expected from such a severe recession, after inflation had so recently been in the double digit range. The agency also added that one-off measures taken by the government to reduce the budget deficit in 2009 could also count against it in the EU authorities' judgment of whether the medium-term budget plans are credible.

The first point is an important one I think. If we go back to the 172 page EU Commission document leaked to the German magazine Der Spiegel last month, the EU Stability and Growth Pact is increasingly going to focus on issues surrounding competitiveness as well as on fiscal deficit ones. That is what the whole deabate over the Greek and Spanish economies which EU leaders are engaging in this week is all about. And any country which is not considered to be in completely good health under the SGP criteria is hardly likely to get the green light from the ECB and Ecofin.

It is obvious that the Estonian economy is still suffering from earlier structural distortions which have not yet been corrected. If we come to the consumer price index, this was only down about 2% in 2009, far short of the deflationary adjustment which will be needed to restore growth and competitiveness.

The producer price index has also not moved as far and as fast as will be needed, since it was only down some 3% on the year.

So the sad truth is that, whether from inside or outside the eurozone, despite some extensive and painful sacrifices made in not having government spending to fall back on during an extraordinarily deep recession - but then, as Krugman would say, Estonia's problems were never fiscal ones anyway, they were always competitiveness ones - there is still a long hard road out there in front. Whatever the advantages and disadvantages of the chosen path one thing is for sure, it will be absolutely impossible for the country to leave the job half done.

Wednesday, February 10, 2010

Latvia's Economy Contracts Almost 18 Percent in Q4 2009

Well, as we say in English, it never rains but it pours. Latvia, which has had the deepest recession of all 27 European Union member states, contracted by nearly 18 per cent in the fourth quarter of 2009. 'Compared to the same period of 2008, gross domestic product (GDP) value has decreased by 17.7 per cent,' according to the national statistics office statement.

The fall was led by a 30-per-cent annual drop in the retail sector. Retail sales are now down by 36% from their April 2008 peak and there is little sign of any turnaround at this point.

Industrial output, which rose slightly over the quarter, fell back again in Deecember (by a seasonally adjusted 4.2%) following a sharp rise in November. Output is still down more than 17% from the February 2008 peak.

Latvian exports were down again in December, making for the second consecutive monthly fall. Despite all the fuss about internal devaluation the CPI was only down by 3.1% in January over January 2009. Prices are still far from being competitive, and no early rebound in export growth is to be expected. Over 2009 as a whole exports - at 3,571.6 mln lats – were down over 2008 by 19.4%, but imports - at 4,633.7 mln lats – fell even further, by 38.4% which is why the trade deficit reduced substantially, but note there was still adeficit. The deficit fell from 225.3 mln Lats in January to 69.7 mln Lats in December. Over 2009 as a whole foreign trade turnover totalled ay 8.2 billion lats, a drop of 31 per cent when compared to 2008.

Unemployment hit 22.8% in December according to Eurostat data, the highest in the European Union.

And even that famed "internal devaluation" seems to be working hellishly slowly. As I say, prices were only down by 3.1% in January 2010 over January 2009 (and probably even less on the EU HICP measure) according to the latest data from the Latvian statistics office.

Even the statistics office statement that GDP actually grew by 2.4 per cent compared to the third-quarter offers cold comfort, since this data is not seasonally adjusted, and the economy will almost certainly be back down again in the first quarter of 2010.

Meanwhile the consequences of this strong recession in Latvia - more and more Latvians are leaving in search of work elsewhere, while fewer and fewer young people feel confident enough to have children (see chart below) - will leave a long scar, which will be hard to heal, and which make the long term future and sustainability of the country even more uncertain.

As the Washington based CEPR argue "the depth of the recession and the difficulty of recovery are attributable in large part to the decision to maintain the country’s overvalued fixed exchange rate, because it prevents the government from pursuing the policies necessary to restore economic growth". Maybe next time someone will learn the lesson before tragedy strikes, and not afterwards.

Wednesday, February 3, 2010

Global Manufacturing Continued Its Expansion In January

The global manufacturing expansion continued to gather momentum in January. Coming in at 56.1, up from 54.6 in December, the JPMorgan Global Manufacturing Purchasing Managers’ Index registered its highest reading for five and a half years. The latest improvement in overall operating performance reflected accelerated growth of production and new orders, while there was a slight gain in staffing levels for the first time since March 2008.

Production increased for the eighth successive month in January, with the rate of expansion hitting a 69-month high. The improvement in the performance of the United States manufacturing sector was most noticeable. The Institute for Supply Management output index rose by 6.5 points since December to reach its highest level since April 2004.

Elsewhere the position was much more uneven, with West European and Japanese manufacturing having a much more qualified start to 2010, with rates of expansion growth well below the global average, - and in the case of some countries well below. Meanwhile emerging economies like Brazil,India and Turkey continued to show a strong performance.

Asia and Emerging Markets

In Japan activity slowed, although at 52.5, the seasonally adjusted Nomura/JMMA Purchasing Managers’ Index pointed to a moderate improvement in operating conditions in the Japanese manufacturing sector at the start of 2010.

Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said:

“The Japan Manufacturing PMI fell 1.3 points to 52.5 in January. It remains above the key dividing line of 50.0, but has continued to fluctuate in recent months. Although the PMI has been holding firm, the sharp rebound phase from February through to August in 2009 has lost steam. Furthermore, the New Export Orders Index fell rapidly, by 3.2 points to 51.5, signaling that the yen’s appreciation has depressed exports which are the main factor behind the current recovery in the Japanese economy. Exports are an important factor of the future of the Where an expansion of production was signalled, panellists generally attributed growth to higher intakes of new orders, which increased for the seventh month running in January. However, the latest improvement in firms’ order books was the slowest in that sequence amid concerns over the sustainability of economic growth. Export sales placed at manufacturers rose again in January, extending the current period of expansion to eight months. Nonetheless, the pace of expansion was the slowest since last June. Anecdotal evidence suggested that increased new business from China and other Asian countries continued to support export growth.

January data signalled that backlogs were depleted at the fastest rate since last June, largely as a result of slower new business growth and a robust rise in output.

Elswhere in Asia, both China and India showed strong expansions. At 57.4, up from 56.1 in the previous month, the headline HSBC China Manufacturing PMI rose to a record high at the start of 2010, signalling a continuing improvement in operating conditions in the Chinese manufacturing sector. The index has now risen more than sixteen points since posting a record low in November 2008. Export sales also rose in January, increasing at a near-record rate. This was in sharp contrast to the severe reductions seen at the beginning of 2009.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist for China at HSBC said:

“Industrial activity continues to accelerate, implying stronger GDP growth in 1Q. But rising input and output prices also point to greater inflationary pressure, which will likely prompt more tightening measures in the coming months.”

The Indian manufacturing sector expanded at fastest pace for nearly one-and-a-half years in January. Climbing to 57.6 in January, its highest level for seventeen months, the seasonally adjusted HSBC Markit Purchasing Managers’ Index signalled a considerable improvement in operating conditions faced by Indian manufacturers. The headline index has now signalled expansion of the sector since April 2009, and at increasing rates for the past two survey periods.

Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, Senior Asian Economist at HSBC said:

“Any lingering concern that India's manufacturing recovery was tailing off should be well and truly put to rest by this strong release. A second consecutive rise in the PMI has taken the series to a new cycle high, consistent with on-going double digit rises in industrial production. The most impressive part of the release was the more than 5 point jump in the new export orders index, which took it to its highest level since October 2007 and indicated that the recovery is by no means dependent on domestic demand alone.

“At the same time, however, price pressures are clearly intensifying. The rate of increase in input prices was the largest since the PMI began nearly 5 years ago, while the survey suggests that companies are more willing to pass on these rises in the form of higher output prices - something which the RBI is unlikely to take too kindly to. Admittedly, the employment index only inched above 50 but it can't be long before job hiring picks up more aggressively.”

Elsewhere among emerging economies, the Brazil performance stood out, with the sector expanding at a considerable pace as shown by the fact the headline seasonally adjusted Brazil Manufacturing PMI climbed to 57.8 in January, its highest level since data were first available in February 2006.

Commenting on the Brazil Manufacturing PMI survey, Andre Loes, Chief Economist, Brazil at HSBC said:

“The Brazilian manufacturing industry expanded at a survey record pace in January. The Manufacturing PMI reached 57.8, up from December’s 55.8, with all five of its components supporting the strong performance of the composite indicator.

“In our view, the particularly strong growth of output, new orders and input stocks – all of them reached series record peaks – indicate further vigorous expansions in manufacturing going forward. Employment also grew faster, but as a variable that normally lags production, its expansion fell short of the three components mentioned above. Last but not least, charges rose, albeit modestly, for the fourth month in a row.

“All in, January’s Brazil Manufacturing PMI confirms the very favorable dynamics of manufacturing activity. This highlights the concern recently expressed by the BCB, that the quick reduction of idle capacity could result in increased inflation pressures.”

While the South African PMI continued to show an increase in activity. The index surged to its highest level in 21 months in January, indicating that a recovery in manufacturing is gathering pace as consumer spending picks up, according to Kagiso Securities who prepared the report. The seasonally adjusted index increased to 53.6 from 52.5 in December. The PMI has now been above 50, which indicates an expansion in factory production, for three consecutive months.

Western Europe

In Europe, solid expansions in output were recorded in Sweden, France, Germany, the Netherlands and Austria, but these were in marked contrast to the deeper recessions in Spain, Ireland and Greece.

The Eurozone PMI hit a two-year high, with France and Germany leading the recovery, while Spain and Greece fell further behind. The headline final Eurozone Manufacturing PMI – a composite index based on measures of production, orders, employment, inventories and supplier performance – posted 52.4 in January, its highest reading for two years. The index value was above both its earlier flash estimate of 52.0 and the final reading of 51.6 posted in December. The level of the PMI has risen in each month since hitting a record low last February and has now remained above the neutral 50.0 mark for four consecutive months.

Commenting on the PMI data, Markit Senior Economist, Rob Dobson said:

“The January final PMI readings confirm that the Eurozone manufacturing sector has built on its positive end to last year, with growth of output and new orders the fastest since mid-2007 and above the earlier flash estimates. However, the recovery is becoming two-track, with Spain and Greece in particular falling further into recession when growth in most of the other nations, led by France and Germany, is accelerating. Manufacturers are also continuing to focus on reducing headcounts and lowering stocks despite gains in output. This suggests that they retain a cautious outlook, especially while sales are still being supported by price discounting.”

But the West European picture was characterised by two extremes. On the one hand we have France and Sweden, were economic activity is rebounding strongly, and on the other there is Spain and Greece, where the contraction continues, and the outlook seems bleak.

Business conditions in the French manufacturing sector improved for a sixth consecutive month in January. The headline Purchasing Managers’ Index posted 55.4, up from 54.7 in December. The rise in the PMI reflected faster expansions of both output and new orders during the latest survey period, while supplier delivery times lengthened at a sharper rate. Manufacturing production increased for the seventh month running in January. Furthermore, the rate of growth accelerated to the strongest for almost nine-and-a-half years, with over one-third of panellists reporting a rise.

Commenting on the Markit/CDAF France Manufacturing PMI final data, Jack Kennedy, economist at Markit, said:

“The recovery in the French manufacturing sector remained intact at the start of 2010. Output rose at the strongest rate for almost nine-and-a-half years in January, as the rebound from the record contraction seen in early 2009 continued. While domestic demand remained the primary driver of growth, there was also evidence of strengthening export sales, indicating a broad-based expansion. However, staffing levels continued to be cut as manufacturers targeted cost savings and productivity gains at a time when input price inflation reached a sixteen-month high.”

In Sweden, activity simpled roared ahead, and the Silf / Swedbank Sweden Manufacturing Purchasing Managers' Index stood at a seasonally adjusted 61.7 in January, well above December's 58.2. The production sub-index surged to 70.2 in January from 59.7 in the previous month. The new orders sub-index climbed to 66.8 from 63.7, with the new export orders sub-index gaining 4.2 points to 62.3. Despite the improvement in new orders and production, employment levels were slashed again. The employment sub-index stood at 49.6, up slightly from 49.5.

In Spain January data pointed to a further deterioration of operating conditions at Spanish manufacturing firms. Both output and new orders fell at faster rates than in the previous month, while employment continued to decrease sharply. Companies offered discounts to clients in an attempt to boost sales, despite input costs rising again during the month.

The seasonally adjusted Markit Purchasing Managers’ Index remained well below the 50.0 no change mark, edging up slightly to 45.3 in January, from 45.2 in December, indicating that business conditions deteriorated for the twenty-sixth successive month. Production contracted for the sixth month running in January, and at a steeper rate than was registered in the previous month. The latest decline reflected a further reduction in new business.

Commenting on the Spanish Manufacturing PMI survey data, Andrew Harker, economist at Markit, said:

“The Spanish manufacturing sector began the new year with output, new orders and employment all continuing to fall. The steepest decline in input buying for seven months highlights the lack of confidence in the sector, with firms reluctant to invest in new stock until sales have been secured. Manufacturers were again forced to cut prices in January as weak demand made it difficult to pass on higher raw material costs to clients.”

Central and Eastern Europe

Turkish manufacturing sector started 2010 on positive footing as output and new orders rose at robust rates. Increased new orders from overseas continued to provide support to expansion of sector, and the growth in employment was sustained. Higher input cost inflation however droves a further rise in output prices. The headline index posted 53.0 in January, indicating a solid improvement of business conditions in the Turkish manufacturing sector. The rate of expansion accelerated since December, and was the strongest in four months.

Commenting on the Turkey Manufacturing PMI survey, Dr. Murat Ulgen, Chief Economist for Turkey at HSBC said:

“The Turkish manufacturing sector has started 2010 with a solid expansion rate, thanks to robust increases in new orders and output. Overall manufacturing activity has also gained traction, breaking the five-month streak of deceleration in the pace of growth since July. Export order growth was also strong, reflective of an improvement in Turkey’s export markets. Manufacturers continued to slash their finished goods inventories in order to partially fulfil rising orders, while backlogs of work were also reduced for the third month. Employment conditions maintained their favourable trend, improving for the eighth consecutive month. On the other hand, the ominous outlook on cost pressures remained intact in January, as input prices continued to rise much faster than output prices, possibly because of soaring raw material prices. This tells us that inflationary pressures are in the pipeline and businesses may pass on rising costs to their end prices when they feel more comfortable about aggregate demand conditions.”

Business conditions in Russia’s manufacturing sector showed tentative signs of recovery at the start of 2010, according to January survey findings from VTB Capital. Output rose for the sixth straight month, and at a faster rate as new orders increased for the first time since last October. Employment continued to fall, but at a much slower rate than the trend pace recorded over late-2008 and 2009. Inflationary pressures strengthened, but remained relatively weak. The headline seasonally adjusted Russian Manufacturing PMI posted above the no-change mark of 50.0 for only the second time in the past eighteen months in January, indicating an overall improvement in operating conditions in the sector. The latest PMI reading reflected stronger positive contributions from the output, new orders and suppliers’ delivery times indices, and less negative effects from the employment and stocks of purchases components. That said, the latest reading of 50.8 signalled only a marginal overall improvement in conditions, and was below the long-run trend of 52.1.

Commenting on the survey, Dmitri Fedotkin, economist at VTB Capital, reported:

“January’s Manufacturing PMI rose to 50.8, the second reading pointing to an expansion across the sector over the past 18 months. The headline number was supported by new orders crossing the no-change 50 level to reach 53.0, while new export orders also rose (50.8). The output index rose to 52.3, pointing to production rising for six straight months and supporting the recent upturn in official statistics. In addition, at 48.2 the employment index improved for the fourth month running with further stabilization expected on the job market. The input price index rose to 61.4 amid higher commodity prices and freight charges while the output price index rose to 54.0 as companies tried to pass rising costs on to customers.”

Hungary's manufacturing purchasing manager index (PMI) jumped 4.4 percentage points to 53.5 points in January 2010, the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) reported on Monday. This marks a halt in the contraction of the manufacturing industry that had started in September 2008. Hungary's manufacturing PMI stood at 53.5 in Jan 10, up by 4.4 ppts from Dec 09. This is the first time since August 2008 when the index is above 50. (The Dec reading was revised upward to 49.1 from 48.5 originally).

HSBC survey data for the Polish manufacturing sector signalled an overall improvement in business conditions in January, in stark contrast to the marked contraction posted one year earlier. The headline HSBC Poland Manufacturing PMI posted 51.0 in January, having been unchanged at a near two-year high of 52.4 in the previous month. Any figure greater than 50.0 represents an overall improvement in business conditions. The PMI remained above its long-run trend of 49.5 in the latest period.

Commenting on the Poland Manufacturing PMI survey, Kubilay Ozturk, economist at HSBC, said:

“The headline PMI remained above break-even in January, but the momentum that prevailed in the last two months of 2009 appears to have lost some steam, with slower expansions in output and new orders. Domestic and external demand continued to improve over the month, albeit at a slower pace, particularly for the former. A decline in the employment index after a long-awaited rise in December confirms the labour market is not out of the woods yet, while the noticeable drop in output prices indicates a benign inflation environment ahead. Overall, the reading is a reminder that a straight-line recovery may not be that likely, although the Polish economy will continue to outperform its regional peers in 2010.”

Czech manufacturing output grew at fastest rate since March 2008 and the latest PMI data compiled by Markit for HSBC showed an overall improvement in business conditions for the third month running in January. Moreover, the rates of growth for both output and new orders accelerated, and were sharper than the averages over eight-and-a-half years of data collection for the survey. Meanwhile, manufacturers shed jobs at a slower pace and continued to cut charges to support sales drives. Supply delays were again registered as firms raised purchasing volumes. The headline HSBC Czech Republic Manufacturing PMI rose to 53.1, signalling a robust overall improvement in business conditions.

Commenting on the Czech Republic Manufacturing PMI survey, Kubilay Ozturk, economist at HSBC said:

“The headline index improved noticeably in the first month of 2010 on the back of a remarkable increase in output and a solid rise in new orders, underlining the uninterrupted improvement in demand. Both external and domestic markets appear to have been on the mend in January, suggesting a wider economic recovery is under way. The latter was also confirmed by a leap in firms’ purchasing volumes over the month. However, subdued increase in EMU manufacturing PMI in January and the downside surprise in a flash estimate for German 2009 growth suggest the impact of fiscal stimuli and car-scrappage schemes in Western Europe may fade earlier than expected, implying recovery may be gradual and bumpy.”