Eastern Europe's biggest manufacturing sectors shrank in December, dragged down by crumbling growth in the euro zone, and with few positive signs on the horizon the region's policymakers may be forced to act to stabilise their economies.     

According to data released on Monday by Markit Economics and HSBC, Poland's Purchasing Managers' Index (PMI) fell to its lowest in more than two years, while the Czech index remained in contractionary territory for the second month in a row.

The indexes are key indicators for predicting future economic activity.      

"The numbers are somewhat disappointing and surely do point to some weakness in the Polish manufacturing sector and they show that neither Poland nor the Czech Republic are immune to the European crisis," said Lars Christensen, chief analyst at Danske Bank.       

Also on Monday, data showed the euro zone manufacturing activity declined for a fifth consecutive month in December, although at a slightly slower rate than November's 28-month low.      

Poland's economy, which is not as export dependent as the neighbouring Czech Republic because of its internal market of 38 million consumers, is largely seen as more resilient to the ongoing debt crisis in the euro zone.     

Poland was the only economy in the 27-strong European Union to avoid recession during the last steep slowdown in 2008 onwards, also helped by loose fiscal policy and a weaker zloty.      

The government now expects growth to slow to 2.5 percent in 2012, from about 4 percent in 2011.

Analysts are less pessimistic and point to 3 percent growth , with nobody predicting a contraction.     

"Today's data clearly point to a worsening external situation, which may negatively impact Poland's economic growth in the coming quarters," said Agnieszka Decewicz, economist at Bank Zachodni WBK.      

Prospects in the smaller Czech Republic are gloomier.     

The Czech government expects a mild recession this year as the main scenario, but has been drafting plans to be prepared for an even more severe downturn, due to mainly foreign factors but also weak domestic demand.     

Prime Minister Petr Necas said in a newspaper interview on Monday a growth forecast of plus 1 to minus 2 percent was realistic. The Finance Ministry is due to release new forecasts at the end of January.      

The Czech Republic is a highly open economy with gross exports equal to 74 percent of GDP in the first nine months of 2011. The share of exports in Poland's GDP is about 40 percent.     

Hungary's PMI index also continued to indicate contraction in December, the association of logistics, purchasing and inventory management said on Monday.    

Germany showed on Monday another month of manufacturing contraction in December, in the latest sign that it can no longer avoid a slowdown that already weighs on others.     

"The (Polish PMI) number poses downward risk to industrial output numbers for December. It seems the Polish economy is beginning to feel the blow (from the euro zone crisis)," said Piotr Bujak, chief economist at Nordea Bank in Warsaw.     

"The figure, especially if followed by deterioration in other economic activity indicators, will make it more difficult for the central bank to sound hawkish, which could lead to lower market interest rates and could be negative for the zloty."        

Analysts expect Poland's central bank to cut interest rates to 4.25 percent in the second quarter from the current level of 4.50. High inflation, also due to a weak zloty, may be risk factor for these forecasts, however.     

"On the one hand rate hikes seem needed as the (weak) zloty risk high inflation and is a threat to financial stability. On the other, economic slowdown is nearing with ever larger steps that should be reacted to with rate cuts," Nordea's Bujak said.      

The Czech central bank held interest rates in December and said crown weakness and other inflation pressures meant its next move was more likely to be a hike than a cut, but kept its options open citing uncertainties from the euro zone debt crisis.       

“Prague may also let the public deficit grow above target this year if the economy contracts,” Prime Minister Petr Necas was quoted as saying on Monday.      

The region's currencies were largely unaffected by the release of the PMI data. – Reuters