* Hungary's output fall slows in June, big trade surplus
* Czech exports inch up from May, but domestic demand weak
* Data rays of hope but too early to say recovery on track
By Krisztina Than
BUDAPEST, Aug 6 (Reuters) - Hungary's poor output data showed improvement in June while Czech exports edged up from May hinting at a possible pickup in foreign demand, although it is too early to say the region is firmly on the path to recovery.
Eastern Europe's export-led open economies, mainly the Hungarian and Czech, have been suffering from a collapse in demand in key export markets, mainly Germany, while domestic demand has been hit by a credit crunch and falling consumption.
Latest PMI data showed this week that Germany's private sector contracted at its slowest pace in 11 months in July and was close to breaking through into growth, which is a promising sign for the EU's emerging economies..
But banks in the region are still reluctant to lend and consumers are economising because unemployment is stuck at high levels.
The Czech trade balance on Thursday showed its second biggest ever surplus of 20.43 billion crowns ($1.13 billion) in June, beating market forecasts of 14 billion and reflecting a continued fall in demand for imports.
Exports inched up by 1.6 percent month-on-month in June while imports fell 1.5 percent, but in annual terms exports still dropped 15.1 percent, after a 21.2 percent fall in May.
Imports dropped 19.3 percent in June, mirroring similar trends in Hungary, where imports in June plunged 29.4 percent year on year, while exports were still down by 21.3 percent.
"As for the (Czech) exports, vehicles and machinery exports still fell but at a rate much slower ... than in the previous two months. This was, after all, already indicated by better than expected preliminary industry data," said Martin Lobotka at Ceska Sporitelna.
"Whether this is already the turnaround in a trend or one-off thing can't be known with certainty at this moment. However, PMI indices, foreign German orders and general improvement in sentiment abroad infuse us with hope that the bottom is near," he added.
Hungary's industrial output fell by an annual 18.6 percent in June based on unadjusted data, less than in May when it dropped 22.1 percent, and month-on-month data showed a rise for the second month running.
"We would need three consecutive months of increase to be able to say firmly that (this is a turning point), but we already see that there is also some improvement among various segments of industry on an annual basis," said Ildiko Miko, a statistician at the Central Statistics Office.
Hungary's economy, which is suffering from a much deeper recession than most of its regional peers, is expected to shrink 6.7 percent this year and shed a further 0.9 percent next year.
"The underlying weaknesses in the region will not disappear overnight. Fragile banking sectors will keep credit conditions tight, while the spectre of fiscal tightening will weigh on growth prospects, particularly in Hungary," Capital Economics said in a recent note.
DIFFERENT STAGES
Reflecting varying prospects for recovery from deep recession or stagnation this year, central banks across the region are in different stages of their policy cycles.
Signs of stabilisation on Hungary's financial markets prompted the central bank to slash rates by 100 basis points last week but at 8.5 percent its base rate is still the highest in the EU along with Romania.
In the Czech Republic, signs of an improvement in foreign demand may be a signal for the central bank to refrain from a further rate cut at a meeting later on Thursday, analysts said.
"It is another 'green shoot' for the Czech economy, so if we can believe the situation is improving then the reasons for monetary easing are declining," said David Marek, chief economist at Patria Finance.
A small majority of analysts in a Reuters poll predicted the bank would keep the main repo rate flat at a historic low of 1.5 percent at their meeting on Thursday, while others forecast a 25 basis point reduction.
"The Czech Republic has seen some pick-up in business confidence in response to Western Europe's car-scrapping schemes. But this fillip may prove temporary and domestic demand has continued to weaken," Capital Economics said.
(Reporting by Krisztina Than and Jan Lopatka in Prague; Editing by Ruth Pitchford)