Factories in China and India cranked up production in March and Japanese business morale rose to its highest in more than a year on signs of improving global demand, boosting hopes for a sustainable economic recovery.

Similar manufacturing surveys later on Thursday were expected to show activity in the United States, Europe and the UK also picked up from February, suggesting gradual improvement in those economies despite worries about high unemployment and massive government debt.

China's official purchasing managers' index (PMI) rose to 55.1 in March from 52.0 in February, beating expectations and pointing to brisk first-quarter GDP growth that could spur further policy tightening by the central bank.

Sub-indexes for output, new orders, new export orders, imports and job creation all rose strongly, as did input prices, highlighting mounting inflationary pressures as the economy surges and companies look to pass on rising costs to consumers.

The headline PMI from a parallel HSBC/Markit survey rose to 57.0, the third-highest level in the six-year history of the survey, from 55.8 in February. A reading above 50 means activity is expanding.

Another substantially high headline manufacturing PMI reading, combined with strong growth of exports, points to an acceleration in industrial production and likely over 11 percent GDP growth in the first quarter, Qu Hongbin, chief economist for China at HSBC, said in a statement on Thursday.

With inflation pressures rapidly accumulating, this increases the risk of interest rate hikes in the coming months.

Investors are keen to see more evidence that the global recovery is gaining momentum to justify the optimism that has pushed U.S. and Japanese stocks to 18-month highs.

Strong demand from China, the world's third-largest economy, is proving a boon for its neighbors as Asia's major Western export markets have been far slower to recover.

South Korea reported March exports rose 35.1 percent from a year earlier, beating an expected 32.9 percent rise.

Taking into account that our main trading partners are China and other emerging markets and those markets are still flourishing, we can expect a positive outlook for the first half of the year, said Kim Jae-Eun, an economist at Hyundai Securities in Seoul.

Japan has also seen a steady export recovery, driven largely by sales to China, which has helped offset persistently weak domestic demand that is hobbling the economy.

The Bank of Japan's tankan survey on Thursday showed morale among the country's big manufacturers, the biggest beneficiaries of the export rise, improved to its best level since the failure of Lehman Brothers shocked financial markets in September 2008.

Large manufacturers expect export sales to grow 4.5 percent in 2010/11, compared with an expected 18.3 percent decline in the fiscal year which ended on Wednesday, though they remain cautious about boosting wages or spending on new plants and equipment.

Japanese manufacturing activity slowed slightly in March, but a rise in export orders to the highest in almost six years suggested production will grow.

India's factories were also busier last month, though growth slowed from a 20-month high in February as companies faced mounting cost pressures.


Many government and investors, however, continue to worry that demand could sputter out, especially as the economic boost from massive government stimulus spending during the global crisis begins to wane.

A move to higher interest rates later this year to curb inflation could also check growth, while raising borrowing costs for consumers and companies. Australia, India and Malaysia have already started hiking rates and China is likely not far behind.

While South Korea's year-on-year export numbers appear impressive, investment bank ING said monthly export growth may have moderated from February, highlighting concerns in Asia that the global recovery may be slower and more uneven than expected.

Data on Wednesday showed U.S. private employers unexpectedly cut 23,000 jobs in March, dampening hopes for a strong rebound just days ahead of a more closely watched payrolls report.

Worries about layoffs have made U.S. consumers more cautious about spending on local and imported goods, though recent reports had shown consumer confidence was recovering.

Chinese government economist Zhang Liqun said time would tell whether the improvement in global demand could be sustained.

From the demand side, the strong recovery in exports might not be sustainable and actual investment growth is slowing. So the outlook for growth in demand and orders is still not clear.

(Additional reporting by Langi Chiang and Alan Wheatley in Beijing, Yoo Choonsik in Seoul and Stanley White in Tokyo; Writing by Kim Coghill; Editing by Kazunori Takada)