Factories in China and India joined much of Europe in slashing output and jobs at a record pace in December, another sign the biggest emerging markets were wilting under the recession gripping industrialized nations.

Factory activity surveys in the United States were also expected to show a steeper contraction in December, as demand collapses in the Western countries that developing nations rely on as export markets.

Economists and policymakers had seen China, Russia, India and Brazil, with their vast markets and rising wealth, as the engines of growth that could save the world from recession. Those hopes are fading fast and forecasts are getting gloomier.

From job loses at Chinese factories to the biggest drop in South Korean house prices in five years, there were signs the export slowdown was rippling through domestic economies in emerging markets.

What is worrying is that the weakness has spread rapidly from the externally-oriented sectors to domestically oriented sectors too, analysts at OCBC Bank in Singapore said in a note after the country announced gross domestic product data.

In contrast to the rapidly darkening economic outlook, the mood in markets has brightened slightly. Having squirreled cash into safe havens for much of the past quarter, investors are eyeing assets pummeled in the financial turmoil of 2008.

STOCKS RISE

Global stocks as measured by the MSCI world index were up 0.6 percent. U.S. Treasuries also eased, in a sign risk appetite was growing after a year in which $14 trillion was wiped off stock markets.

It feels like we've passed through the eye of the storm, Robert Rennie, chief currency strategist at Westpac in Sydney said of the financial crisis triggered by U.S. bank failures last year.

That's not to say there isn't another storm on the horizon, but for the moment the intense pessimism of October and November seems to have eased.

Weakening global demand pushed down oil prices to around $41 a barrel, however. The factory activity surveys painted a similar picture from around the globe.

China's manufacturing activity fell for a fifth month, the Purchasing Managers' Index showed on Friday. The index rose to 41.2, up from November's record low of 40.9, indicating that while manufacturing was still shrinking, the pace had slowed.

But the output sub-index fell to 38.6, signaling the sharpest contraction in production since the survey was launched in April 2004. Any score below 50 indicates a contraction.

With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession, Eric Fishwick, head of economic research at CLSA, which publishes the index.

For Chinese policymakers worried about social stability the most alarming news may have been the employment sub-index, which showed factories shedding jobs at the fastest pace on record.

Russia's PMI showed a contraction in manufacturing deeper than the slump during its 1998 financial crisis.

In India, factories cut jobs for the first time in the survey's 3- year history to reduce costs. The central bank slashed its two key short-term interest rates by 100 basis points to try to stimulate the economy.

In all three countries, factories reported slumping export orders with recession chilling demand in their largest markets -- the United States, Japan and Europe.

EURO ZONE CONTRACTION

Manufacturing activity in the euro zone sank to a record survey low in December, below an already dire flash reading and the outlook remains grim as new orders sank to new lows.

It casts an even darker shadow over the state of the euro zone economy, said Bank of America economist Gilles Moec.

We think it is consistent with a major contraction in GDP both in the fourth quarter of 2008 and the first quarter of 2009 -- probably something like a contraction of a full percentage point in both quarters.

Britain's manufacturing sector also contracted for an eighth month. More signs of gloom over the British economy came from another steep fall in house prices in December and a record low of mortgage approvals for house purchases in November.

Smaller Asian exporters are bracing for a double blow from the collapse in Western demand and from regional customers.

South Korea, which ships a fifth of its exports to China, said export growth this year would be about 1 percent, the weakest since 2001.

Singapore's government cut its economic forecast to a range between a decline of 2 percent and growth of 1 percent in 2009. Citigroup said that forecast was still too optimistic.

If we are correct, 2009 will mark the most severe recession in Singapore's history, surpassing the Asian Financial Crisis and the 2001 tech recession, said Citigroup economist Kit Wei Zheng.

There were also signs of the slowdown biting in Africa, where some had hoped their less developed economies would be more isolated.

Tanzania cut growth forecasts and put off plans for a sovereign bond. Mauritius cut its 2009 growth forecast, fearing the global impact on its textile factories and the number of tourists visiting its Indian Ocean island beaches.

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