Manufacturing activity surged across Asia in September as demand picked up, although plans by Japanese manufacturers for record cuts in capital spending cast doubts on the strength of a recovery in the industrialized world.

A surprise slowdown at U.S. Midwest factories also suggested the road back to global economic health will be a rocky one, even if Asia powerhouses such as China continue to build up steam.

A nationwide U.S. manufacturing activity survey due later in the day is still expected to show growth picked up slightly last month, while reports from the Eurozone could show activity there is still contracting slightly. Factories in Britain, meanwhile, likely saw a rebound after an unexpected dip in August.

The world economy is finally stirring from a deep recession, led by the swift turnaround in Asia, the International Monetary Fund said on Thursday.

The Fund now expects the world economy to shrink by 1.1 percent in 2009 before growing by 3.1 percent in 2010, more upbeat than its last report in July.

Still, it cautioned the pace of a recovery is expected to be sluggish for some time and the biggest risk is if governments withdraw support measures too soon, causing growth to stall.

Highlighting that wary outlook, the Bank of Japan's tankan survey showed big manufacturers plan to cut capital spending by a record 25.6 percent in the fiscal year through March 31, more than indicated in a June survey.

Capital spending typically has been a key growth driver for Japan's economy, but is now one of its weakest links as companies cut expenditures to protect fragile profits.

A recent string of surprising weak U.S. economic reports, meanwhile, is casting fresh doubts about a rebound in consumer demand that is vital for a strong global recovery.

Surveys on Wednesday showed activity at U.S. factories in the nation's heartland slowed last month while private employers cut more jobs than expected, which could weigh on confidence.

What it comes down to is how much of this recovery is going to be sustainable. I'm not a believer yet that this is a robust economy. This is going to be a very frustratingly weak growth period, said Robert MacIntosh, chief economist at Eaton Vance Corp in Boston.

By contrast, much of Asia continues to gather strength.

Factories ramped up production in China, Japan, South Korea, India and Australia last month with new orders picking up from buyers at home and abroad. Some Asian companies such as Japanese construction equipment maker Komatsu <6301.T> have reported a sharp rise in sales to China in particular as its growth jumps.


China's manufacturing activity expanded for a seventh month in September, official data showed on Thursday, largely in line with a private survey on Wednesday.

The official purchasing managers' index (PMI) rose to 54.3 from 54.0 in August, the strongest reading in 17 months, the China Federation of Logistics and Purchasing (CFLP) said.

The report was fresh evidence that growing domestic demand in China is helping to offset weak exports, though some analysts worry the economy is still too reliant on government stimulus as the main way to generate activity.

Those concerns are shared by many policymakers around the world as they wait for signs recoveries are on a solid footing.

Eventually, they will have to start weaning economies off emergency life support in the form of massive government spending and ultra-low interest rates, but if they tighten policy too early or too sharply they risk derailing growth and destabilizing financial markets.

In South Korea, the HSBC/Markit manufacturing Purchasing Managers' Index showed activity expanding for a seventh month, though the rate of growth eased slightly to 52.7 from 53.6 in August. Separately, exports in September fell 6.6 from a year earlier, much less than expected.

India also saw manufacturing grow at a faster clip again after wavering in August. The HSBC Markit Purchasing Managers' Index, based on a survey of 500 companies, advanced to 55 in September from 53.2 in August.

It is encouraging to see the PMI index move up again in September after last month's decline, allaying fears that the industrial cycle has peaked, said Robert Prior-Wandesforde, senior Asia economist at HSBC.

Given that the full effects of the monetary and fiscal stimulus have still to be felt and the regional, world trade cycle should improve, we are confident that industrial growth will not just remain firm but trend higher from here, he added.

The Australian Industry Group/PriceWaterhouseCoopers Performance of Manufacturing Index rose 0.3 points to 52.0.

There was a marked turnaround in employment after 20 months of decline, with hiring and firing now essentially in balance.

A return to job creation is vital for a durable economic recovery.

(Additional reporting by Lesley Wroughton in ISTANBUL, Wayne Cole in SYDNEY and Jason Subler in BEIJING; Writing by Kim Coghill; Editing by Jeremy Laurence)