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BW Businessworld

Manufacturing Growth Surges

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India's manufacturing sector grew at its fastest pace in eight months in January as factory output surged the most on record on increased domestic and foreign demand, a business survey showed on Wednesday.

The HSBC manufacturing purchasing managers' index (PMI), compiled by Markit, jumped to 57.5 from 54.2 in December.

"Activity in the manufacturing sector rebounded again in January led by higher demand from both domestic and foreign clients, suggesting some recovery in sentiment in recent months," said Leif Eskesen, economist at HSBC.

India's headline PMI has held above the 50 level that separates growth from contraction for almost three years, underlining the sector's resilience in the face of a global downturn and euro area debt crisis.

India's factory output sub-index jumped to 62.9 in January from 55.8 in December, the biggest rise from one month to the next on record. Both the output and the new orders indexes rose to their highest level since May last year.

The figures suggest a startling pick up in a sector that has been battered by feeble growth in the United States and Europe and a prolonged spell of monetary policy tightening in India.

Industrial output expanded 5.9 per cent in November from a year earlier, official data showed last month showed, beating all forecasts and swinging from a contraction of 4.7 percent in October.

Analysts have cut their forecasts for the economy and expect it to grow in the year to March at its slowest pace in two years. The economy grew 6.9 per cent in the quarter ended September 2011.

After 13 rate rises to stamp out inflation in between March 2010 and October 2011, the central bank signalled last month it was shifting its focus to growth by cutting the cash reserve requirements for banks by 50 basis points.

The PMI suggests more strength lies ahead because new orders showed demand from both domestic and export clients. However, price pressures remain as input costs grew at a faster pace than in December.

"These numbers suggest it's premature for the RBI to cut policy rates and that they have to await evidence of a significant and sustained decline in inflation and/or further materialization of downside risks to growth before they can roll out rate cuts," Eskesen said.

Wholesale inflation, the main measure of price pressures in India, slowed to a two-year low of 7.47 percent in December as rising food costs slowed sharply. However, manufacturing inflation was still strong, leaving the central bank little room for more aggressive policy measures to help growth.

Asian Factory Output Curbed By Troubled Europe
Crumbling demand from Europe restrained Asia's export-powered economies in January, data released on Wednesday showed, putting pressure on policymakers to shore up domestic growth to counter the drag from abroad.

China's factory activity picked up modestly, the government's purchasing managers' index showed, but new export orders fell sharply from December and the country's finance minister said exporters faced "increasing difficulties."

The official PMI for China inched up to 50.5 in January from the previous reading of 50.3, barely making it above the 50 level that separates expansion from contraction, as the world's second-largest economy feels the chills from Europe's debt troubles.

"As the external demand is now fading clearly, Chinese exporters are facing increasing difficulties," China's Finance Minister Xie Xuren said in remarks on Wednesday.

Asia's export-reliant countries remain on the edge as the euro zone muddles through a messy sovereign debt crisis that threatens to tip the region into a recession. Europe is the biggest trading partner for many Asian economies, including China.

Data due later on Wednesday is expected to show the euro zone's factory activity contracted in January for a sixth straight month. A similar poll on US factory activity is expected to show manufacturing picked up in January.

In South Korea, exports posted a shocking 6.6 per cent drop from a year earlier in January, far worse than the 0.7 percent increase that economists polled by Reuters had predicted. Its exports to the European Union tumbled 45 per cent in the first 20 days compared with the same period a year earlier.

South Korea's manufacturing sector activity and new export orders both shrank for a sixth straight month in January, the longest losing streak in three years.

In Taiwan, faltering exports bit into factory activity which shrunk for the eight straight month. The index rose to 48.9 in January from 47.1 in December.

"Taiwan's manufacturers are still struggling, but the deterioration of operational conditions they face is stabilising," said Donna Kwok, economist at HSBC.

"It is still too early to declare Taiwan immune from faltering European demand."

Hong Kong's government unveiled more than $10 billion in budget measures on Wednesday to support its economy. The territory's currency is pegged to the US dollar, so it has no real monetary policy room to support its economy.

India bucked the gloomy trend, with factory activity growing at its fastest pace in eight months. Unlike most of its Asian peers, India's economy is primarily driven by domestic factors and it is far less exposed to flagging export demand.

The PMI reading of 57.5 in January, marking almost three years of expansion in the manufacturing sector, brought some cheer to an economy hurt by monetary policy tightening and the government's policy paralysis.

Analysts have cut their forecasts for the Indian economy and now expect it to grow at its slowest pace in two years in the 2011/12 fiscal year, a Reuters poll showed. The economy grew 6.9 percent in the quarter ended September 2011.

No Major Policy Shifts
The factory activity index figures out of Asia underscore the region's vulnerability to the crisis in Europe and the need for policymakers to shield their economies by boosting domestic demand.

China's economy faces risks in 2012, as weakening external demand cuts into exports growth, China's Xie said.

"It is necessary and also possible for us to continue to implement a proactive fiscal policy," he said.

Xie said that his ministry would provide more fiscal support to small-to medium-sized enterprises and step up efforts to cut taxes for some selected sectors to restructure the economy away from exports and towards domestic consumption.

China's economy grew at its weakest pace in 2-1/2 years in the latest quarter and might head for an even sharper slowdown in coming months. Xie said inflationary pressures in China remain strong, an indication that policymakers are unlikely to drastically ease policy any time soon.

In South Korea, still-elevated inflation at a time when Asia's fourth-largest economy is weakening leaves the country's central bank with little room to change its interest rate policy for the next several months.

The Bank of Korea's head of inflation research team, Lee Jae-rang, told Reuters it was premature for the authorities to be complacent about inflation, adding pressures will remain high for the time being.

In India, the survey also showed price pressures remained firmly in place as input costs grew at a faster pace than in December.

"These numbers suggest it's premature for the RBI to cut policy rates and that they have to await evidence of a significant and sustained decline in inflation and/or further materialisation of down side risks to growth before they can roll out rate cuts," said Leif Eskesen, economist at HSBC.