Emerging Market Growth Stalls, Q3 Production Falls -HSBC

Emerging Market Growth Stalls, Q3 Production Falls -HSBC

Emerging-market output grew at weakest pace in 9 quarters; Q3 factory output contract, services growth at nine-quarter low; HSBC EM Index falls to fourth-weakest in series history

October 12, 2011 8:03 by Reuters

Emerging economies grew at their weakest pace in over two years in the July-September quarter as manufacturing output turned negative after expanding for nine straight quarters, an HSBC quarterly index showed on Wednesday.

HSBC’s emerging markets index (EMI), based on 21 purchasing managers’ surveys in 16 emerging economies, dropped to its fourth-lowest reading in its history, registering 51.9, down from 54.2 in the April-June quarter.

“Consistent with the significant weakness in world trade, manufacturing has performed worse than the services sector,” said Stephen King, chief economist at HSBC.

Manufacturing output turned negative in the third quarter, ending a nine-quarter period of growth, while the services sector grew at its weakest pace in nine quarters.

South African, Taiwanese and Brazilian manufacturers saw marked rates of output decline while those in China and Singapore suffered more marginal and modest rates of reduction. Indian factory output dropped to a 2-1/2-year low.

Eastern European manufacturers generally fared better than their counterparts in Asia though all saw production growth moderate during the three months.

Turkey and Israel were the only emerging market manufacturing sectors to post a faster increase in output.

“It is now apparent that world trade growth peaked in the first quarter. Companies in the emerging world have reacted by clearing their order backlogs at a faster rate than before, helping to support near-term activity,” said King.

Barring a quick rebound in trade growth, stagnating jobs growth in the emerging world could turn into employment losses, he warned.

Business confidence slipped to a series-record low in China while Russian service sector firms were the least optimistic in 10 quarters.

POLICY FLEXIBILITY

Emerging market manufacturers reported lower volumes of new export business for the first time in nine quarters as foreign order levels slid across the majority of markets with the exceptions of the Czech Republic, Saudi Arabia and the United Arab Emirates.

The EMI reading also indicated that monetary tightening measures by central banks across the emerging world had helped to rein in price pressures, with the rate of input cost inflation easing to a four-quarter low.

The softening of global commodity prices also helped to slow the rate of inflation as did easing domestic demand, HSBC said.

“This is a silver lining if you want to look at it. Inflationary pressures have eased,” King said.

“If you compare emerging with developed markets, there is more room for policy flexibility as interest rates are still positive in the emerging world.”

However, it would be wrong to conclude that emerging economies are about to launch policy stimulus again on a scale similar to that seen in 2008/2009.

“It’s probably a case of ‘once bitten, twice shy’ with many policymakers fearful of generating another wave of inflationary pressures” HSBC concluded.

By Sebastian Tong