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GLOBAL ECONOMY-Manufacturing shrinks across developed world

Reuters - Thursday, October 2

* US ISM manufacturing index lowest since Oct 2001

* Euro zone factory activity weakest since December 2001, production weakest since month after 9/11 attacks

* UK factory PMI weakest in near-17-year survey history

* Japan Tankan index for big manufacturers turns negative

* China gets boost as factories gear up after Olympics

By Burton Frierson and Ross Finley

NEW YORK/LONDON, Oct 1 - Manufacturing industry in the developed world contracted in September as global financial turmoil hurt businesses and all the signs pointed to more economic weakness ahead.

Factory activity in the euro area showed the fourth straight month of contraction in September, with output at its weakest since straight after the Sept. 11, 2001 terror attacks seven years ago, a survey of firms by Markit showed on Wednesday.

Similarly, U.S. factory activity shrank in September to its lowest since the 2001 recession, as the credit crisis tightened its grip on the world's largest economy. For details see [ID:nN01504188]

The U.S. report painted a comprehensive picture of weakness, with employment and new orders falling significantly. Meanwhile markets nervously awaited signs Congress would rescue the financial sector and get it back to lending to companies. [ID:nL1119662]

"With this slowdown going on, you add the inability to fund your business in the short run. That puts all the more pressure on Washington to get something done for the banking system," said Gail Dudack, chief investment strategist at Dudack Research Group in New York.

"It's really all about confidence, because without that, things can unravel quickly, and that's what happening in the global financial sector."

The ISM report followed data showing U.S. private-sector employers cut 8,000 jobs in September, a decrease that took place even without including the renewed financial chaos of the past few weeks.

Another report showed planned layoffs at U.S. companies rose 7.2 percent from a month earlier in September but jumped 33 percent compared with the same month a year ago, all of which bodes ill for Friday's comprehensive monthly payrolls data by the government.

With a report also showing the euro zone jobless rate rose to 7.5 percent in August, analysts said the 15-member bloc was sliding towards recession and the European Central Bank would turn its focus away from inflation and cut interest rates soon.

"This is giving an indication that growth has completely stalled now and you may get a recession," said Dario Perkins, economist at ABN AMRO. "It's a major turnaround from where we were 12 months ago."

BELEAGUERED BRITAIN, CONCERN AT ECB

Britain's manufacturing sector put in its worst performance in at least 16-1/2 years. [ID:nL1448378]

That fanned fears that Britain has entered its first recession since the early 1990s and added to speculation that the Bank of England could cut interest rates at its meeting next week rather than waiting until next month.

"I'm astonished by the scale of the collapse," said Philip Shaw, chief economist at Investec. "Clearly manufacturing surveys have been negative but this takes it to a new level."

Manufacturing activity in India expanded at its weakest pace in 14 months but rebounded in China after two months of contraction, partly because factories were allowed to reopen after the Beijing Olympics in August.

Economists said the ECB also had reasons to be concerned after an unexpected rise in euro zone unemployment to 7.5 percent from 7.3 percent.

All 81 economists polled by Reuters last week expected the ECB to leave rates unchanged at 4.25 percent on Thursday but a majority expect an interest rate cut by March. [ECB/INT]

"In tomorrow's ECB press conference, we will look carefully for any sign of a more cautious labor market assessment," said Marco Valli, economist at Unicredit MIB in Milan.

"Acknowledging the end of the labor upswing would put into question the ECB's conviction that the economic recovery will resume starting from the current quarter and gather momentum in 2009. This would be an important signal on the way to rate cuts."

Firms world-wide have faced difficulties in accessing liquidity as global money markets have been paralyzed but there were signs on Wednesday of short-term liquidity returning, though banks were loath to lend to each other for longer periods [ID:nT325302].

In Japan, the closely-watched Tankan index of manufacturing turned negative for the first time since 2003 showing a weak world economy was hurting its fragile, export-reliant economy.

But many firms may have responded to the month-long survey before U.S. investment bank Lehman Brothers collapsed on Sept. 15, so the number probably understated the impact on sentiment, analysts said.

Japanese exporters are facing their weakest markets in decades. In August the country posted its biggest trade deficit for any month since 1982, excluding the traditional export slowdown every January, and exports to the United States recorded their sharpest ever decline.

(Additional reporting by Tetsushi Kajimoto in Tokyo; Jonathan Cable and Christina Fincher in London, Jan Strupczewski in Brussels, Jason Subler in Beijing and V Ramakrishnan in Mumbai, Editing by Chizu Nomiyama)

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