Easing Manufacturing Slump in Central Europe

By Jason Hovet
PRAGUE (Reuters) – A slump in most of Central Europe’s manufacturing sector eased in January, with firms expressing optimism about the outlook, but analysts warned of risks from potential U.S. tariffs on Europe.

The S&P Global Purchasing Managers’ Index (PMI) for Poland rose to 48.8 last month, up from 48.2 in December, while the Czech PMI increased to 46.6, from 44.8 in December. Both indices have remained below the 50 mark, which divides expansion from contraction, since mid-2022.

In Hungary, a PMI published by the country’s Association of Logistics, Purchasing and Inventory Management edged lower to 49.8 in January after two months of expansion.

The surveys highlighted that a lack of orders from euro zone trade partners, such as Germany, continues to hinder Central Europe’s economic recovery, which currently relies on rebounding household spending.

There are growing fears that Europe could face U.S. tariffs after President Donald Trump’s imposition of tariffs on Mexico, Canada, and China. He indicated that trade measures against the European Union would also be forthcoming.

While Central Europe lacks significant direct exposure to the U.S. market, it plays a substantial role in production chains for its western neighbors, and could be adversely affected through these trade channels.

“While Central Europe isn’t particularly dependent on the United States as a source of final demand, tariffs could only add to the headwinds,” said Capital Economics in a note.

In addition to the risks posed by German economic weakness and potential U.S. tariffs, exporters in Poland are struggling with the zloty currency hitting seven-year highs.

Tariff Impact

The PMI surveys indicated that the decline in factory output in Poland and the Czech Republic slowed last month, with orders also dropping at a lesser rate.

Firms in both countries reported improved sentiment regarding future prospects. However, analysts noted that Hungarian firms were more cautious, facing stagnation in manufacturing.

“One cannot ignore the significant improvement in expectations,” noted Polish group Bank Millennium, raising hopes for recovery in the domestic manufacturing sector. However, they cautioned that this scenario remains uncertain, especially due to the looming U.S. tariffs on EU-manufactured goods.

Last week, the Czech Finance Ministry forecasted that the country’s economic growth would accelerate to 2.3% this year, driven by better household demand. However, it estimated that a 10% tariff on Europe could slow GDP growth by 0.4-0.5 percentage points.

Czech lender MONETA Money Bank’s Chief Executive Tomas Spurny indicated that the economy would suffer more than that under U.S. tariffs. Raiffeisen economists warned that the January PMI is unlikely to signal a turning point in the Czech sector’s recovery.

“Economic growth predictions for Germany are quickly decreasing to zero,” they stated. “And there is the threat of a trade war.”