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World factory output curbed by troubled Europe

An employee works at a garment factory in Wuhu, Anhui province.


Crumbling global demand restrained factory output in Asia and most of Europe in January, business surveys showed on Wednesday, putting pressure on policy makers to shore up growth and counter a spreading malaise.

Asia's export-reliant countries, while far more resilient, remain vulnerable to the euro zone's messy sovereign debt crisis that threatens at best to tip the currency bloc into a recession and at worst to rip it apart.

Meanwhile, the first rise in German manufacturing output in four months was not enough to offset prolonged contraction in the currency union's smaller economies and suggests that the bloc will not avoid that recession.

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"There is an awful long way to go yet and given that the headwinds that these economies face I would be cautious about being too optimistic," said Peter Dixon at Commerzbank.

"Germany continues to motor on and show a reasonable amount of dynamism and that will drag France along and maybe Italy but it is not really going to help the likes of Greece. You need much more buoyancy from domestic demand which at the moment appears to be sadly lacking."

The Eurozone Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 48.8 last month from 46.9, revised up from a flash reading but recording its sixth month below the 50 mark that divides growth from contraction.

French manufacturing contracted again in January, as did major economies Spain and Italy, as well as Greece and Ireland.

Data from Britain was decidedly more upbeat than the figures from continental Europe, showing its manufacturing sector unexpectedly grew in January. The PMI rose to 52.1 from 49.6, easily beating expectations for 50.0.

The official China PMI inched up to 50.5 in January from 50.3, which was welcome news. But the new export orders fell sharply, again underscoring the troubles in Europe.

"As the external demand is now fading clearly, Chinese exporters are facing increasing difficulties," China's Finance Minister Xie Xuren said in remarks on Wednesday.

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The HSBC Markit PMI for China told the same if slightly more negative tale, holding at 48.8 in January.

"Chinese manufacturing has not yet reached a bottom. The trend so far has been consistent with our view that the current downturn will be shallower but more extended than the last downturn," said Yao Wei at Société Générale.

Comparable figures due later from the United States, the world's biggest economy, are expected to show an uptick in activity as well. Economists in a Reuters poll expect a rise to 54.5 in the Institute for Supply Management index from 53.1.

India bucked the gloomy trend, with factory activity growing at its fastest pace in eight months. Unlike most of its Asian peers, India's economy is far less exposed to export demand.

The PMI reading of 57.5 in January marked almost three years of expansion in the manufacturing sector and brought some cheer to an economy hurt by monetary policy tightening and the government's policy paralysis.

South Korea's manufacturing sector activity and new export orders both shrank for a sixth straight month in January, the longest losing streak in three years. And in Taiwan, faltering exports bit into factory activity which shrunk for the eight straight month.

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South Korean exports posted a shocking 6.6-per-cent drop from a year earlier in January, far worse than the 0.7 per cent consensus in a Reuters poll. Its exports to the European Union tumbled 45 per cent in the first 20 days compared with the same period a year earlier.

Indeed, the euro zone is expected to be in recession during the first half of this year, according to a Reuters poll, but this assumes the debt crisis will not flare out of control.

Fears that Greece could face a disorderly default if it does not quickly secure a debt swap deal with private creditors, or that Portugal might require a second bailout, continue to rattle investors.

On Monday, most European Union states agreed to a German-led pact that will impose quasi-automatic sanctions on countries that breach EU budget deficit limits and will enshrine balanced budget rules in national law. That, however, will not solve euro zone countries' immediate borrowing troubles.

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