Economic growth across emerging markets was the fastest in three quarters in the first three months of this year as manufacturing rebounded and the services sector accelerated although growth in China slowed, a survey showed on Thursday.
HSBC's emerging markets index (EMI), based on 21 service and manufacturing sector purchasing managers' surveys in 16 emerging economies, rose to 53.4 in the first quarter of this year. That was up from 52.4 in the fourth quarter of 2011 and further above the 50 mark that signals growth in activity.
"Compared with Q3 and Q4 there has been some acceleration in business and service activity in Q1, there has been a bit of an improvement," said Murat Ulgen, chief economist, central and eastern Europe and sub-Saharan Africa at HSBC.
"This is still below the long-term average, it's too early to speak of business as usual. The key reason is that manufacturing is being dragged down by China."
The data confirms PMI surveys on individual emerging economies released last week.
Emerging market manufacturers reported an increase in output for the first time in three quarters, but China posted its sharpest decline in production for three quarters, weighing on the sector.
The world's second-biggest economy was the only one of the large emerging economies of Brazil, Russia, India and China, collectively known as the BRICs, to report lower manufacturing production in the first quarter.
India's manufacturing growth reached a three-quarter high and Brazil's production rose for the first time since the second quarter of last year. Manufacturing in Russia also rose but at the slowest pace since the third quarter of 2011.
China's new export orders fell at the steepest rate in three years as demand remained subdued in markets such as Europe, where the sovereign debt crisis has dented consumer sentiment. Of the BRICs, only India posted an increase in export orders.
The service sector continued to outperform manufacturing, with service providers in emerging markets reporting the strongest growth in three quarters, while service sector business optimism hit a 1-1/2 year high.
Inflation easing
The EMI reading indicated that unconventional monetary measures, such as the "quantitative tightening" carried out by the Chinese government which raised banks' reserve ratios, reduced inflationary pressures in China and across emerging markets.
High oil prices have had no significant impact on emerging market inflation so far, HSBC said, and policymakers are now more focused on promoting growth than reducing inflation.
However, inflation remained high in India and Turkish input price inflation was still high even as output price inflation fell. Emerging market policymakers will also need to be aware of "hot money" risks to inflation as excess liquidity resulting from very low interest rates in the West finds its way to emerging markets, HSBC said.
Emerging markets must now manage a delicate balancing act between supporting growth and keeping inflation in check, but have more policy flexibility than their Western counterparts to trim interest rates, cut reserve ratio and resort to fiscal stimulus to encourage growth if needed, the bank said.