Services drive Q1 output in emerging markets

LOS ANGELES (MarketWatch) � Overall output growth in emerging markets accelerated in the first quarter of 2012, with most developing nations able to withstand the effects of the euro-zone crisis. But a lag in activity among Chinese manufacturers stood out as a source of pressure, according to data from HSBC.

HSBC�s Emerging Markets Index registered a reading of 53.4 in the first three months of 2012, up from 52.4 in the fourth quarter of 2011. The index logged its second consecutive quarter of growth, and rose at the fastest rate in three quarters. A reading of 50 or higher indicates expansion.

The most recent reading �underlines the relative immunity of emerging nations to more damaging developments elsewhere in the world,� said HSBC, whose EM Index is based on 21 purchasing managers�s index surveys conducted in 16 emerging markets.

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Still, the index remains at a relatively low level, �suggesting that there has, as yet, been no return to �business as usual,�� said Stephen King, HSBC�s chief economist, in a statement.

The surveys collectively track business conditions at more than 5,800 reporting companies.

India, of the four largest emerging markets, saw the sharpest rise in overall activity. China�s expansion in overall activity was marginal, with growth at its slowest in three years.

Bolstering the EM Index headline figure was �sustained� expansion of activity at service providers. Growth in the sector was at the strongest level in three quarters, though it remained below trend. Rates of expansion were broadly similar in Brazil, India and Russia. Brazil�s expansion was at its fastest rate in almost four years.

However, the �main drag� on manufacturing output on the index�s headline level was underperformance by Chinese manufacturers, who reported a third straight quarter of reduced production.

China was the only one of the four largest emerging markets to register lower manufacturing production in the first quarter. New export orders at the start of 2012 fell at their sharpest pace in twelve quarters. China�s slowdown �is not just an export story�, said King, as new orders in total remained weak, continuing a softer pattern observed through much of 2011.

�This domestic softening owes a lot to earlier persistent increases in Chinese banks� reserve ratios, an attempt to bring earlier inflationary pressures under control via �quantitative tightening,�� he said.

There was a sour note sounded in Russia as well, with production growth easing to �within touch� of the nine-quarter low logged in the third quarter of 2011.

Only India, of the largest emerging markets, recorded growth of new export orders in the first quarter. The Czech Republic, Israel, Singapore and South Korea posted reduced export sales.

Aside from the height of the worldwide financial crisis in the fourth quarter of 2008 and the first quarter of 2009, the index measuring trends in factory output was the lowest on record.

A brighter spot in the report stemmed from optimism among service-sector businesses, which was at the highest level in a year-and-a-half. Brazilian service providers held the most optimistic view about the 12-month outlook for business activity.

Overall, emerging nations �still have to perform a juggling act, balancing the risks of too little growth against the threat � if not yet the reality � of too much inflation,� said HSBC�s King. Rising commodity prices have the capacity to add both to inflation and, on a more worrisome level, to income inequality, he said.

The outlook for emerging nations remains encouraging, King added. �With the developed world suffering from economic permafrost, emerging nations are set to move further up the global economic rankings.�

By 2050, the world�s top three economies are likely to be China, the U.S. and India, and the top ten economies will include Brazil and Mexico, King said.

The EM Index is produced in association with market research firm Markit.