* Poland's manufacturing sector contracts for the second
straight month in June.
* Czech expansion slows for third consecutive month, export
growth remains close to May's 35-month low.
By Michael Winfrey
PRAGUE, July 1 (Reuters) - The global economic slowdown
tightened its grip on Eastern Europe in June, data showed on
Tuesday, as strong currencies and weak euro zone demand put the
squeeze on manufacturing, the engine of the region's growth.
Two of the biggest emerging economies in the European Union
tracked the euro zone's first contraction in three years, with
Poland shrinking for the second straight month in June and the
Czechs showing their third deceleration in growth.
The RBS/Markit Polish Purchasing Managers Index survey
<PLPMI=ECI> showed a drop to 47.9, versus 49.3 in May. It was
below the 50 mark that indicates a contraction in production
from the previous month.
New orders fell to 47.2 and output fell to 48.1 points.
Czech PMI <CZPMI=ECI> slipped to 50.7, the weakest rate of
expansion since a growth period began in October, 2002.
"The manufacturing sector is clearly signalling the good
times are over and the slowdown is taking place," said Raffaella
Tenconi, an economist at Dresdner Kleinwort in London.
"The rest of the economy tends to be in better shape, but
the moderation in exports will eventually feed through to them
too. Consumer sentiment is cooling rapidly in the Czech Republic
and it has begun to weaken in Poland."
EXPORTS SUFFER
PMI in the euro zone, which is eastern Europe's main
destination for exports, dropped to 49.2 in June, the first
contraction since June 2005.
Manufacturing in the EU's 12 mostly ex-communist newcomers
closely track the euro zone, and whenever demand falls in the
West, its impact is felt in industry in Poland, Hungary,
Slovakia and the Czech Republic.
That was nowhere more clear than in Poland, where export
orders showed their biggest fall in almost seven years in June,
dropping to 43.2, from 46.9 in May.
The survey said firms linked the fall to the strong zloty
<EURPLN=>, which has gained about 30 percent since Poland joined
the European Union in 2004 and 7.1 percent this year, and the
euro zone slowdown.
The Czechs, too, have cited their crown currency <EURCZK=>,
as a dampening factor on exports which, similar to orders from
domestic consumers, remained close to a 35-month low hit in May.
The crown is near all time highs of 23.82 per euro. It has
firmed around 17 percent to the euro in the past year and 9.4
percent since the start of 2008.
"The currency appreciation will continue to hit export
numbers in these countries I think for a good few months," said
Debbie Orgill, a senior economist at ABN Amro, which presents
the data.
Still, in both countries strong currencies have helped fight
a surge in prices driven by steadily growing domestic demand and
spiking global commodity costs which, for the Czechs, pushed up
input prices at the fastest rate since March.
Poland's central bank hiked interest rates to 6.0 last week
to combat inflation which has tracked global price growth higher
and was near a four year high of 4.4 percent in May.
The Czechs held the cost of borrowing steady at 3.75
percent, or 25 basis points lower than the euro zone, last week,
helped by the strong crown currency.
But analysts said an expected rate hike by the European
Central Bank this week may make the crown less attractive, while
persistently high inflation -- the central bank said it could
hit 7 percent this summer -- could prompt higher interest rates.
"The fact that the exchange rate is cited as a key cause of
weaker export demand could signal some slowing in the rate of
appreciation," Orgill said of the Czechs.
"Price components moved higher, which could add to the cause
for a near-term interest rate hike.
