Factory output growth slowest in two years

India’s factory sector expanded at its slowest pace in more than two years in August as export orders shrank amid weakening global demand, a survey of manufacturers in Asia’s third-largest economy showed.

Still, India was one of the few countries to show growth.

Similar surveys released on Thursday showed manufacturing activity contracted in the euro zone, Britain and China, with PMI readings all below the 50 level that demarcates growth from contraction.

The HSBC Markit India Manufacturing PMI fell to 52.6 in August, below expectations for 52.9 and July’s reading of 53.6. It was the lowest reading for the PMI since March 2009, when it was below 50. “The main driver of the weaker reading was a significant contraction in export orders, which are facing stiff global economic headwinds,” said Leif Eskesen, chief economist for India & Asean at HSBC. Growth in new manufacturing orders in India slowed for the fifth consecutive month, while the export orders index fell to 45.0 in August from 49.2 previously, the second consecutive month it has contracted, the survey showed.

Cooling order growth suggests the headline PMI is likely to slow further in the months ahead. “It’s very clear that these outside risks are rising,” said D.K. Joshi, principal economist at Crisil in Mumbai. “There are clear downside risks to industrial activity.”

Weakening global demand, rising prices and tighter monetary policy by the central bank have combined to crimp India’s economic growth. Data this week showed the economy grew 7.7% in the three months to June from a year earlier, its slowest pace in six quarters.

India’s manufacturing sector grew 7.2% in April-June from a year earlier, an improvement from the previous quarter but below the 10.6% growth clocked a year earlier, although the services sector continued to perform well and demand from rural consumers remains robust.

Maruti Suzuki, maker of nearly half the cars sold in India, this week posted a 12.7% annual drop in August sales, its third straight monthly decline.

Prospects for the rich-world’s economies look shaky after a US sovereign debt rating downgrade by Standard and Poor’s in early August sent global stock markets into a tailspin, while recent economic releases have pointed to a dire outlook in the months ahead. Hopes that emerging markets will continue to offset weakness in the West are fading as even fast-growing BRIC nations such as China and India lose momentum amid the global downdraft. Brazil surprised financial markets on Wednesday by cutting interest rates, citing the darkening international economic outlook.

India’s economy, which grew 8.5% in the fiscal year that ended in March, is expected to slow significantly in the current fiscal year, with Morgan Stanley​ forecasting growth of 7.2%.

Worries that the US economy could slip back into recession, heavy selling in global financial markets in August and Europe’s festering debt crisis have soured consumer and corporate confidence. The pace of growth in the US manufacturing sector ticked down to a crawl in August, faring better than economists had forecast but remaining at the lowest level in two years, an industry report showed on Thursday.

The US Federal Reserve said last month it expected to leave interest rates on hold at least until mid-2013 and markets are looking ahead to its September meeting for cues on whether there will be a third round of asset purchases or QE3 to prop up the limping economy.

The Reserve Bank of India (RBI) has raised interest rates 11 times since March last year as it struggles to rein in high inflation, with the last hike in July by a greater than expected 50 basis points, taking the repo rate to 8%. Many economists expect another rate increase at RBI’s next meeting on 16 Sep, and believe it will pause thereafter.

The PMI survey showed inflation will likely remain a major concern in India, with growth in factories’ input prices accelerating for the third month running.

“Inflation pressures remain elevated, with input prices accelerating and output prices still trekking up, albeit at a marginally slower pace,” said Eskesen.