Conditions in the Czech manufacturing sector deteriorated in June for the first time since August 2020, albeit only marginally, driven by a renewed decrease in output and a faster decline in new orders. The Purchasing Managers’ Index (PMI) data from S&P Global reached 49.0 points in June, down from 52.3 in May.
"The Czech manufacturing sector signalled a contraction in operating conditions in June, as output fell and new orders tumbled. Client demand decreased sharply and at a pace not seen since the depths of the initial pandemic lockdown, as inflation and supplier delays weighed further on purchases," commented Siân Jones, Senior Economist at S&P Global Market Intelligence.
Weak client demand was negatively impacted by inflationary pressures on customer spending. Firms stated that hikes in supplier, material, fuel, energy and transportation costs drove inflation. However, despite higher inflation, the pace of increase in cost burdens was the softest since February 2021. In line with softer increases in cost burdens, manufacturers registered a slower growth in output charges in June.
Also as a result of soaring inflation and lower new order volumes, firms cut their workforce numbers, which was the first fall since September 2020. Backlogs of work dropped for the first time since October 2020.
"Rates of inflation remained historically marked, but eased again, suggesting that rates of increase may have already peaked. Energy, fuel, material and supplier price hikes continued to be highlighted as the key drivers of inflation. In an effort to spur on new orders and in line with softer increases in costs, output charges rose at the softest pace for a year," Jones added.
Czech manufacturers posted the fastest decrease in output since May 2020. Supply-chain disruption led to a drop in customer demand through 2022. According to the respondents, customers have prioritised essential goods in times of increasing cost burdens. Foreign client demand remained subdued, with new export orders going solidly as inflation in key export markets hampered customer purchases.
New orders declined for the fourth consecutive month, with the rate of decrease being sharp and the quickest for two years.
"Downside risks to manufacturing growth remain numerous, key among these for panellists was the impact of inflation on customer and investor spending. Output expectations dipped, with our latest forecast expecting a 0.9% increase in industrial production in 2022," Jones noted.
Output expectations in a year-ahead outlook were the second-worst in two years in June. The manufacturers expressed greater concern over the further impact of inflation on customer and investor spending.