AI spending boom boosts global spending activity

Factory activity surged across Europe and Asia in September, driven by strong demand for goods, particularly in the artificial intelligence sector, despite ongoing energy price shocks and elevated inflation, according to surveys released on Thursday. Central banks, including the Federal Reserve and European Central Bank, have begun raising interest rates to combat inflationary pressures, leading to a sharp decline in bond markets and higher borrowing costs for companies grappling with increased production expenses.

Nonetheless, many factories continue to benefit from a surge in demand for their products. S&P Global's Eurozone Manufacturing PMI climbed to 52.9 in September from 52.7 in August, marking its highest level since May 2022, largely attributed to strong demand for AI-related goods. Growth was widespread across the region, with the Netherlands spearheading the expansion. Germany, Europe's largest economy, experienced solid growth, while France, Italy, and Spain recorded modest expansion.

S&P Global economist Iain Simmons noted that the consistent strength in surveys suggests building momentum for Q3 and improved industrial support for growth. Demand for capital goods, especially AI and defense equipment, led the increase, while consumer goods demand declined due to price pressures. However, Simmons expects the sector's contribution to grow stronger but unevenly in Q3 due to faster cost and selling-price expectations.

In Asia, manufacturing in major exporters such as Japan, South Korea, and Taiwan also improved in September, with South Korea experiencing the most significant growth in four months due to robust export demand rising at the fastest pace in 15-1/2 years. South Korea's PMI hit 56.7 in September, up from 54.7 in August, indicating expansion, while Taiwan's PMI rose to 56.7 from 54.7 in August.

Both new orders and production growth reached their highest levels in five-and-a-half years in South Korea, with anecdotal evidence pointing to the combined strength of the semiconductor and automotive sectors as the main drivers of this growth.

China's factory activity also expanded last month as easing weather disruptions allowed factories to resume operations. Japan's S&P Global PMI declined to its weakest level in six months in September due to slowed output and new orders but a continued rise in new export orders driven by robust demand from Asia and improved sales to the US.

Despite elevated cost pressures, firms have continued to raise selling prices at one of the sharpest rates since late 2022. India's manufacturing sector expanded at the fastest pace in seven months, reviving hiring and lifting business confidence, while other Asian economies saw patchy activity, with Indonesia and Vietnam expanding, while the Philippines and Malaysia contracted.