BENGALURU/TOKYO (Oct 1): Factory activity across Europe and Asia expanded last month as demand, partly boosted by the global AI spending boom, remained strong even as the energy price shock from the Iran war kept inflation elevated, surveys showed on Thursday.

Rising inflation pressures across the globe have pushed several central banks, including the Federal Reserve and European Central Bank, to start hiking interest rates, with more increases expected. This has contributed to a sharp selloff in bond markets, pushing up borrowing costs for firms already hit by increased production costs.

However, surveys show that, for now, many factories are reaping the benefit of a surge in demand for their products.

S&P Global's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 52.9 in September from 52.7 in August, its highest level since May 2022, partly due to stronger demand for artificial intelligence-related goods.

Growth was broad-based across the bloc, with the Netherlands leading the expansion. Germany, the region's largest economy, recorded solid growth while expansion was modest in France, Italy and Spain.

"The PMIs continue to paint a stronger picture of euro zone industry than the latest data. The sustained strength in surveys points to building underlying momentum over Q3 and to improved industrial support for growth," said Iain Simmons, economist at Oxford Economics.

"The strength was concentrated in demand for capital goods, specifically AI and defence equipment, while consumer goods demand fell amid price pressure... However, faster cost and selling-price expectations will weigh on the outlook, so we expect the sector’s contribution to be stronger but uneven in Q3," Simmons said.

In Asia, manufacturing in major exporters Japan, South Korea and Taiwan also improved last month, benefitting from AI optimism.

South Korea, in particular, saw factory activity grow in September at the biggest margin in 4 months, as export demand grew at the fastest pace in 15-1/2 years.

Taiwan, a key player in the AI field, saw its PMI hit 56.7 in September, up from 54.7 in August. The 50-level divides expansion from contraction.

"Both new orders and production growth hit the highest for around five-and-a-half years, with anecdotal evidence often linking the expansions to the combined strength of the semiconductor and automotive sectors," said Usamah Bhatti, economist at S&P Global Market Intelligence, about South Korea.

On Wednesday, surveys showed that China's factory activity also expanded last month as easing weather disruptions allowed factories to resume operations.

Japan's S&P Global PMI declined in September to its weakest in six months as output and new orders slowed, although new export orders rose for a ninth straight month due to robust demand from Asia and improved sales to the US.

Still, cost pressures remained elevated with firms continuing to raise selling prices at one of the sharpest rates since late 2022, the Japanese survey showed.

India's manufacturing sector expanded at the fastest pace in seven months, reviving hiring and lifting business confidence.

Factory activity for other Asian economies was patchy. While Indonesia and Vietnam saw activity expand, the Philippines and Malaysia contracted, surveys showed.

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