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Manufacturing Powers Growth in Emerging Markets

Industrial output is moving back on track in countries including China and India, though inflation pressures are mounting.

The revival of confidence among both consumers and corporations and the subsequent expansion in manufacturing have helped emerging-market economies to vault back to levels seen before the onset of the global financial crisis.

Manufacturing output and new orders growth in emerging-market economies recorded the highest expansion since the second quarter of 2004, according to the latest HSBC Emerging Markets Index (EMI) from HSBC, a London-based banking and financial services organization.

The growth, combined with robust service-industries data, outperformed developed nations—reaffirming that emerging markets are the vanguard of global economic recovery. The EMI rose to 57.4 in the first quarter of 2010, which was up from 56.3 in the last quarter of 2009 and significantly higher than six quarters ago, when the index dipped to 43.4. Manufacturing output rose to 58.6 from 56.5 and services business activity climbed to 56.5 from 56.1

Meanwhile, the Purchasing Managers' Index (PMI) data for China and India shows strong manufacturing growth in March, with Chinese output growth supported by a near-record rise in new orders, while input price inflation remained substantial. In India, business conditions continued to strengthen in March, but input cost inflation accelerated to the highest in the five-year series history.
China improves

At 57.0, the headline HSBC China Manufacturing PMI rose to its third–highest level in the survey history during March, pointing to a marked improvement of operating conditions in the Chinese manufacturing economy. For the first quarter of 2010 as a whole, overall growth of the sector was the most marked since the start of the series in April 2004.

The press statement from HSBC quotes Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC as saying, “Another substantially high headline manufacturing PMI reading, combined with strong growth of exports, points to an acceleration in industrial production and likely over 11 percent year-over-year GDP growth in [the first quarter]. With inflation pressures rapidly accumulating, this increases the risk of interest rate hikes in the coming months.”

In India, meanwhile, the seasonally adjusted HSBC PMI Index slipped slightly last month from February’s twenty-month high, going from 58.5 in February to 57.8 in March. The fall largely reflected weaker expansions of both output and new orders. Nevertheless, the PMI remained at a level consistent with a sharp improvement in overall operating conditions. The index has now registered above the neutral 50.0 mark in each of the past 12 months.

Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, Senior Asian Economist at HSBC said, “The most attention-grabbing aspect of the March PMI was the surge in input prices to a new series high, suggesting that companies are facing sizeable and mounting cost pressures. The survey also indicates that manufacturers are becoming more willing to pass on some of these increases in the form of higher output prices.”

Double digits

Meanwhile, India posted double-digit industrial growth for a sixth straight month in February. India’s industrial output grew 15.1 percent in February—less than expected—after government moves to unwind stimulus measures in the face of rising inflation, official figures show.

Industrial production, which includes mining, manufacturing and power generation, slid from January's 16.7 percent growth after peaking at 17.6 percent in December, the Ministry of Statistics said.

Manufacturing output rose 16 percent in February from a year earlier, while output of capital goods rose 44.4 percent and consumer durables production rose 29.9 percent.

There is a revival of confidence among both consumers and corporations, whether it pertains to job security or profit expectations, which, in turn, is translating into higher spending on durables or plant and machinery.

Even with some economic indicators pointing to a slowing from peak levels of earlier months, analysts say India’s recovery appears firm enough to unwind the stimulus put in place to shield the economy from the downturn. India’s economy should expand by up to 8.75 percent this financial year to March 2011 and return to pre-financial crisis growth levels of 9 percent next year, according to the government.

About the author

Uday Lal Pai,, is a freelance journalist based in India.

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