CEE Economic Divergences: Navigating Opportunities in a Fragmented Manufacturing Landscape

The manufacturing sectors of Poland, Hungary, and the Czech Republic have diverged sharply in 2025, creating a stark contrast between contractionary pressures in the former two and a nascent recovery in the latter. As Poland's manufacturing PMI plummeted to a two-year low of 44.8 in June 2025, and Hungary's index dipped to 48.9—both signaling contraction—the Czech Republic defied the trend with a surprise expansion to 50.2. This divergence underscores sector-specific opportunities for investors amid regional macroeconomic fragmentation, particularly in Czech equities and CEE private infrastructure.

Poland and Hungary: Domestic Demand Risks Dominate

Poland's manufacturing sector has been buffeted by a perfect storm of external and internal challenges. The June PMI decline—the sharpest since October 2023—reflected a collapse in new orders and output, exacerbated by tariff-related uncertainty and weak domestic demand. Geopolitical tensions with key European partners, coupled with elevated input costs (despite recent moderation), have forced firms to cut employment for the fourth consecutive month.

Hungary's contraction, while less severe, is equally concerning. The June PMI of 48.9 marked the second straight month of contraction, driven by weakening external demand and a decline in export orders. The sector's recovery from April's marginal expansion (revised down to 50.2) highlights structural fragility, particularly in labor markets. With unemployment rising and consumer sentiment depressed, domestic demand is unlikely to stabilize soon.

Czech Resilience: Exports and Efficiency Drive Recovery

The Czech Republic's manufacturing rebound stands out. The June PMI surge to 50.2—its first expansion since February 2022—was fueled by a 15-month high in new orders and a modest output increase. This contrasts with May's contraction (48.0), which had been attributed to supply-chain disruptions and weak European demand. Key advantages include:
1. Export Diversification: Czech manufacturers rely less on volatile domestic markets, with 60% of output destined for export. Automotive and machinery exports to Germany and the U.S. have proven resilient.
2. Cost Discipline: Input cost inflation slowed to a three-year low in June, enabling firms to stabilize margins.
3. Innovation Hubs: Prague and Brno's tech ecosystems attract global automakers (e.g., Tesla's supplier partnerships) and green energy firms, driving R&D investment.

Investment Thesis: Czech Equities and Infrastructure as Safe Havens

The divergence in PMI trends suggests a compelling case for reallocating capital to Czech assets, leveraging undervaluation caused by broader CEE sentiment drag.

1. Czech Equity Outperformance

Schroders' latest analysis highlights Czech equities as among the cheapest in CEE, trading at a 25% discount to historical averages. Key sectors to target:
- Automotive & Machinery: Firms like Skoda Auto (subsidiary of VW) and První Banka (exposed to manufacturing loans) benefit from export resilience and German supply-chain ties.
- Tech & Green Energy: Companies like Avast (cybersecurity) and CEZ Group (renewables) are undervalued despite strong demand for digital and decarbonization solutions.

2. CEE Private Infrastructure: A Defensive Bet

Citi's risk analysis underscores the stability of CEE infrastructure assets. Portfolios in logistics, renewable energy, and digital networks—such as Poland's PCC Logistics or the Czech's Energo company—are insulated from cyclical manufacturing downturns. Yields of 6-8% reflect undervaluation due to regional sentiment overhang.

Risks and Caveats

• External Demand Shocks: A hard landing in Germany or China could disrupt Czech exports.
• Political Risks: Hungary's populist policies and Poland's judicial disputes remain tail risks.

Conclusion: Position for Czech Alpha

The Czech Republic's manufacturing rebound, paired with its structural advantages, positions it as a standout play in a struggling CEE region. Investors should pivot toward Czech equities (e.g., SKW, Tereos) and private infrastructure funds focused on the country, while avoiding overexposure to Poland and Hungary's domestic demand-heavy sectors. As Schroders notes, “Czech assets offer a rare combination of growth and valuation—a recipe for outperformance as regional divergences deepen.”

In this fragmented landscape, capital reallocation to Czech opportunities is not just prudent—it's essential.