By Jan Lopatka
PRAGUE | Wed Oct 31, 2012 6:20am EDT
PRAGUE Oct 31 (Reuters) - Polish and Czech business confidence remained negative in October, reflecting deep gloom in manufacturing sectors suffering from sagging demand in the euro zone and at home.
The figures pointed to an overall economic slowdown in the third quarter in Poland, whose impressive growth has begun to fizzle out, and an extension of the recession that has strangled the Czech economy since the last quarter of 2011.
Poland's purchasing managers index (PMI) inched up to 47.3, beating forecasts of a further decline, but the improvement is coming from September's 38-month trough.
In the neighbouring Czech Republic, the index dropped to 47.2, the worst result since the bottom of the 2009 recession that followed the global downturn after the fall of Lehman Brothers.
The poor readings open the scope for action on the monetary policy front, including the start of rate cuts in Poland, which has so far avoided loosening policy, HSBC economist Agata Urbanska said.
"We expect the central bank to start an interest rate cutting cycle in November," she said.
"The scale of policy easing in this cycle is still an open question as the leading indicators domestically and abroad, among them PMI, still give no indication of the economic slowdown bottoming out in the near future."
The Polish data, while slightly better than last month and above expectations, showed a drop in new export orders to a 40-month low.
Poland had surprised the market by keeping policy on hold last month, when the central bank left rates at 4.75 percent. Analysts expect an at least 25 basis point cut to 4.5 percent at the next central bank meeting on Nov 7.
Economists polled at the beginning of October forecast growth to slow to 2 percent next year -- mild by EU standards but painful for the emerging country that has enjoyed uninterrupted expansion for the last two decades.
In the even more export-driven Czech Republic, the central bank sees the economy contracting 0.9 percent this year.
The PMI drop followed weak flash PMI readings in Germany, where the manufacturing index dropped to 45.7 in October, far below forecasts of 48.0.
"Reasons for pessimism in Czech industry are obvious: it is mainly a concern about developments abroad as the drop in PMI is caused mainly by falling orders, both domestic and from abroad," said David Marek, chief economist at Patria Finance.
"There is a only a small hope that the indicator would get above the 50-point mark by the end of year. It is another signal... for the central bank to continue lowering interest rates, or possibly use interventions to ease monetary policy."
The Czech central bank faces dilemmas over next policy steps after it had cut the main repo rate to an all-time low of 0.25 percent in September.
Most analysts expect the bank to hold on Thursday, with a minority predicting a cut to 0.15 percent.
The bank has said it could use foreign exchange interventions to weaken the crown currency if it needs to relax policy further, in an environment when poor export demand adds on to a domestic drop in spending by budget-cutting government and conservative households.
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