Global manufacturing slows, optimism in markets

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(Agencies)
Updated: 2009-01-03 15:33

Factories from India to Europe, the United States and China slashed output and jobs in December, but investors seemed determined on Friday to start the new year on a positive note, pushing stocks higher.

US factory activity fell to a 28-year low in December, according to a report from the Institute for Supply Management showing a contraction that was more severe than expected.

The ISM index of US national factory activity fell to the lowest since 1980 amid mounting evidence that demand is collapsing in the Western countries that developing nations rely on as export markets.

In contrast to the rapidly darkening economic outlook, the mood in markets has brightened slightly. Having squirreled cash into safe-havens for much of the past quarter, investors are eyeing assets pummeled in the financial turmoil of 2008.

"We're seeing some New Year optimism," said Andre Bakhos, president of Princeton Financial Group, in Princeton, New Jersey.

Global stocks as measured by the MSCI world index gained 2.5 percent and US indices ended around 3 percent higher. US Treasuries prices eased, in a sign investors' appetite for risk was growing after a year in which $14 trillion was wiped off world stock markets.

"It feels like we've passed through the eye of the storm," Robert Rennie, chief currency strategist at Westpac in Sydney, said of the financial crisis. "That's not to say there isn't another storm on the horizon, but for the moment the intense pessimism of October and November seems to have eased."

World governments have started pumping more than $1 trillion into their economies to stem the financial crisis and spur growth, and investors are eagerly awaiting more details of US President-elect Barack Obama's stimulus plan.

Obama, who takes office on Jan. 20, plans to meet congressional leaders on Monday to discuss their legislative agendas, including how to jump-start the US economy. Obama officials have been discussing an economic stimulus bill in the range of $675 billion to $775 billion.

Gloom Spreads to BRICs

Economists had seen the BRICs -- China, Russia, India and Brazil -- with their vast markets and rising wealth, as the engines of growth that could save the world from recession. Those hopes are fading fast and forecasts are getting gloomier.

From job losses at Chinese factories to the biggest drop in South Korean house prices in five years, there were signs the export slowdown was rippling through emerging markets.

"What is worrying is that the weakness has spread rapidly from the externally-oriented sectors to domestically-oriented sectors too," analysts at OCBC Bank in Singapore said in a note after the country announced gross domestic product data.

China's manufacturing activity fell for a fifth month, the Purchasing Managers' Index showed.

"With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession," said Eric Fishwick, head of economic research at CLSA, which publishes the index.

Another alarming news is the employment sub-index, which showed Chinese factories shedding jobs at the fastest pace on CLSA's record. The employment index tracked by CLSA has contracted for five consecutive months to 45.2 in December.

In India, factories cut jobs to reduce costs for the first time in the survey's 3-1/2 year history. The country's central bank slashed its two key short-term interest rates by 100 basis points to try to stimulate the economy.

Factories, Carmakers Report Bad News

The world's leading economies fared no better, and there was more bad news in the hard-hit auto sector.

Ford Motor Co said it expects industry-wide December US auto sales to drop by some 35 percent year-on-year with no sign of a turnaround in the first quarter.

Spanish car sales nearly halved in December and Italy reported a 13 percent fall in December sales.

Manufacturing activity in the euro zone sank to a record survey low in December, a survey showed, and the outlook remains grim as new orders sank.

"It casts an even darker shadow over the state of the euro zone economy," said Bank of America economist Gilles Moec.

"We think it is consistent with a major contraction in GDP both in the fourth quarter of 2008 and the first quarter of 2009 -- probably something like a contraction of a full percentage point in both quarters."

Britain's manufacturing sector also contracted for an eighth month. More signs of gloom came from another steep fall in UK house prices in December and a record low in mortgage approvals for house purchases in November.