Central European PMIs drop as EU funds slow, Brexit fears mount

By Robert Muller and Marcin Goclowski

PRAGUE/WARSAW (Reuters) - Factory activity in the Czech Republic unexpectedly shrank in July for the first time since April 2013 and barely grew in Poland, surveys showed on Monday, suggesting a decline in output ahead.

Central Europe's growth has outpaced most of the European Union's, but it now faces a slowdown in EU development funds as a new funding period gets under way. It also must contend with the potential effects of Britain's vote in June to quit the EU.

The headline Czech manufacturing purchasing managers' index fell to 49.3 in July, below the 50-point mark dividing expansion from contraction. That was down from 51.8 in June and below a forecast of 52.1 points in a Reuters poll.

In Poland, manufacturing growth slowed to its lowest level since September 2014 to a reading of 50.3, down from 51.8 the month before. Only Hungary's PMI, compiled using a different methodology, rose, to 53.9 from 50.9.

"Industry is hit hard by slower investment activity, dragged down by the low inflow of EU funds," said Jana Steckerova, an economist with Komercni Banka in Prague.

The Czech and Polish surveys showed their first drop in new orders for several years, with the former the lowest in three years and the latter near a two-year low.

A survey last week showed manufacturers in Germany, a major trade partner for the region, grew more pessimistic about exports after the British vote. However, PMI data on Monday signalled steady growth last month.

Some Czech companies reported weaker trade with Russia and Slovakia, according to Markit.

Capital Economics analysts said Monday's PMI readings suggest growth in industrial production growth will slow to around 2 percent in central Europe in the coming months.

"That said, we'd caution against reading too much into last month's figures," William Jackson, senior emerging markets economist, said in a note.

He said the surveys contradicted similar data released by the European Commission. "One possible explanation for this is that the PMIs may have captured more of the initial hit to sentiment from the UK's referendum than the EC survey," he said.

Analysts have also noted any real impact from Brexit would only come later. For now, a slower flow of EU funds is having an effect.

The Czech finance ministry reported last week that EU funds collection dropped to a net 66.6 billion crowns ($2.73 billion) in the first half, down from a record 126.8 billion a year ago.

The ministry also lowered its forecast for economic growth in 2016 to 2.2 percent -- less than half the 4.6 percent expansion in 2015 -- from a previous forecast of 2.5 percent.

In Poland, where economic growth slowed in the first quarter for the first time in more than two years, the government expects fresh EU funds to start fuelling the economy again in the third or fourth quarter.

(Writing by Jason Hovet, editing by Larry King)