Business

GENEVA — World trade will grow by 2.8 per cent this year and could be pegged back further by a US interest rate rise, China's economic slowdown or Europe's refugee crisis, the World Trade Organisation (WTO) said on Wednesday.

The forecast, revised down from a 3.3 per cent forecast made in April, means 2015 will be the fourth year in a row with trade growth of less than 3 per cent, half the annual average in 1990-2008 before the financial crisis hit.

The WTO's forecast implies growth will quicken this year, from 2.5 per cent growth in 2014. But its expectations have repeatedly proved overly optimistic as hopes of global economic recovery have receded.

There were still big potential risks to its latest numbers.

"These include a sharper-than-expected slowdown in emerging and developing economies, the possibility of destabilising financial flows from an eventual interest rate rise by the US Federal Reserve, and unanticipated costs associated with the migration crisis in Europe," the WTO indicated in a statement.

The Chinese slowdown already caused the WTO to cut its 2015 forecast for growth in Asian imports to 2.6 per cent, down from a 5.1 per cent projection in April, and Asian exports to 3.1 per cent from the previous 5 per cent forecast.

China's falling demand was one major reason why global trade shrank in the first two quarters of 2015, contracting from the previous quarter by an average of 0.7 per cent. Falling demand in Brazil and oil and commodity prices also contributed.

However, year-on-year global growth for the year to date is still positive, at 2.3 per cent from the same period of 2014.

In 2016, world trade is expected to grow by 3.9 per cent, a revision of the WTO's previous forecast of 4 per cent.

That rebound is predicated on Asian import growth bouncing back from 2.6 per cent in 2015 to 4.3 per cent, as well as Latin America flipping from a 5.6 per cent import contraction this year to 5.7 per cent import growth in 2016.

The WTO forecasts covered trade in goods, but not trade in services.

Separately, the former head of the WTO said on Wednesday that Russia's push to boost sales of homegrown products while imports are hit by sanctions will be economically damaging if past experience is any guide.

Pascal Lamy, speaking at the Reuters Russia Investment Summit, said that in the short-term domestic producers could benefit but in the long run consumers are likely to lose out because prices for products will be higher.

Trade between Russia and Western countries is restricted by sanctions imposed by both sides over the conflict in Ukraine, which has dragged relations to their lowest level since the Cold War.

Russia's government has made a big push for "import substitution" — encouraging domestic firms to switch focus to replacing imports that, because of sanctions, are no longer available on the Russian market.

"In most of the cases I have known import substitution policies have failed," said Lamy, who was director general of the WTO for two terms from 2005 until 2013. "They degrade the efficiency of their economy."

"It'll work in terms of increasing local production. But that is not the fundamental point. The fundamental point is whether the consumer has value for his or her money," he indicated at the Summit, held at the Reuters office in Moscow.

Prices vs patriotism

A surge in patriotism in Russia triggered by the conflict in Ukraine might go some way to mitigating consumers' dissatisfaction over higher prices, Lamy said, but he questioned how long that would last.

Russia has challenged the Western sanctions imposed on it over Ukraine, while questions have also been raised about whether Russian countersanctions, banning imports of many Western foodstuffs, are in accordance with WTO rules.

Lamy declined to comment on what would be the outcome of the different sets of litigation over sanctions.

But he said that Western sanctions, which focused on travel bans, financial services and weapons, had been carefully calibrated so as not to breach international disciplines on trade.

Russia's counter-measures, meanwhile, were trade sanctions. He added that WTO rules say such sanctions are not allowed, except on grounds of national security.

"The Russian sanctions are import bans. They are selective, they target some countries and not others, which in WTO terms is discrimination," he indicated.

Lamy was head of the WTO when Russia entered the organisation in 2012 after years of negotiations.

Since joining, Russia has been embroiled in multiple trade disputes with fellow members. The European Union accuses Russia of restrictive practices to protect its carmakers, and of putting what it calls excessive import duties on paper and palm oil.

Lamy though said that such disputes were a normal part of WTO membership and Russia was no more problematic than some other new members had been.

"I think it was the right thing to do," he said on the decision to admit Russia to the WTO. "It's good for Russia, good for the WTO."

LONDON/NEW YORK — Global investors limp into the fourth quarter of a volatile 2015 nursing the worst financial market returns since the credit bust and banking collapse of 2008 and with few hopes of making up ground before the end of the year.

Of 21 major financial benchmarks tracked by Reuters, only two are up so far this year as slowing growth, most worryingly in China, an emerging market crisis and prolonged uncertainty on when US interest rates might rise have slammed markets around the world.

The exceptions, the US dollar and 10-year US Treasury bonds, have historically been seen as cash-like havens and have posted returns of 6.2 per cent and 2.5 per cent respectively.

In the three months to September, they rose 0.4 per cent and 3 per cent, respectively, with US-based government-Treasury funds drawing seven straight weeks of inflows totalling $10 billion, according to Lipper data ended September 23.

Only German and Italian government bonds joined the dollar and Treasuries in positive territory during the quarter.

That leaves investors in a quandary: Do they throw caution to the wind in the fourth quarter and attempt to claw back their losses? Or do they hunker down and ensure that the damage done in the previous three doesn't get any worse?

Certainly, the investment backdrop got dramatically more challenging in the third quarter. The volatility in those three months accounts for most of the year-to-date damage investors have suffered, and in some cases all.

The biggest year-to-date declines have been in copper (-21 per cent), emerging market equities (-18 per cent) and Brent crude oil (-16 per cent), the data show.

Billionaire US activist investor Carl Icahn is convinced that a serious downturn is looming.

"I am more hedged than I have ever been," Icahn told Reuters in an interview this week.

Equities had a lousy quarter, and not just in the emerging world. The S&P 500 had its worst three-month performance in four years and Japan's Nikkei had its worst since the three months after Lehman Brothers collapsed in late 2008.

Dollar's crown slipping?

Investors in other markets suffered much bigger losses in the three months to September 30. Chinese A shares listed in Shanghai plunged nearly 30 per cent and Brent crude oil shed a quarter of its value.

Analysts have been falling over themselves in recent weeks to issue the most bearish outlook on commodities and emerging markets. Among the most notable was Goldman Sachs' note last month that oil could fall as low as $20 a barrel.

Such dramatic price swings often herald an imminent reversal. JP Morgan Asset Management's strategists aren't alone in retaining a positive outlook for the fourth quarter, arguing that investors have simply gotten too bearish.

"Given that we consider US recession risk to be low, the returns offered by higher-quality high yield credit are now attractive relative to equity," they wrote in a recent client note.

"We keep our optimism on the US economic outlook and as such remain overweight developed market equities versus emerging markets, and overweight the US dollar versus emerging market currencies," they indicated.

The dollar was the best-performing asset of all in the third quarter, rising 6 per cent against a basket of major counterparts on expectations the US Federal Reserve (Fed) will soon lift US rates and as investors sought a safe port in the emerging market storm.

That is the tide the dollar doubter HSBC is swimming against, almost alone. This week, it issued even more bullish euro forecasts, calling for $1.14 at the end of this year from $1.05 previously, and $1.20 at the end of next from $1.10.

But anti-consensus calls that bold are few and far between, especially with Fed Chair Janet Yellen's finger hovering over the rate hike trigger.

New York Fed President William Dudley said on Monday that rates will "probably" rise this year, perhaps as soon as October if the economy continues to improve. But "lift off" expectations have been consistently dashed for well over a year now.

"There is not enough global growth to go around and the Fed realises it," Jeffrey Gundlach, who oversees DoubleLine Capital, said.

"If we are talking about global gross domestic product and you gave me an over and under number, I will always take the under number," Gundlach added. 

The deteriorating global outlook will force the Fed to wait until next year, he remarked.

In its latest Global Financial Stability report published on Tuesday, the International Monetary Fund warned that emerging market firms, which have amassed a record $18 trillion of debt, need careful monitoring as the era of record low interest rates nears its end.

JAKARTA – Indonesia on Tuesday introduced more stimulus measures to woo desperately needed investment, in its latest bid to boost the sliding rupiah and breathe new life into the slowing economy.

It was the second time this month that Southeast Asia's top economy has unveiled steps to battle a sharp slowdown, as it comes under pressure with other emerging markets due to a strengthening US economy and turmoil in China.

"We are making [investing in Indonesia] as attractive as possible," said Chief Economics Minister Darmin Nasution, announcing the latest measures along with several other ministers. "We must fix, simplify, make it cheaper."

New measures announced Tuesday included slashing the time taken to process investment permits from at least eight days to just three hours, with processing for permits in mining and geothermal projects in forested areas to be cut from up to four years to about 15 days.

To keep US dollars in the country, the government said it was cutting taxes for exporters who deposit their foreign exchange revenue in the country or convert it to rupiah, which should make it more attractive than depositing funds in countries such as neighbouring Singapore, Finance Minister Bambang Brodjonegoro said.

President Joko Widodo, who has been in office for almost a year, is faced with a dire economic situation. 

The rupiah has plunged about 20 per cent against the US dollar this year, while the economy is forecast to grow less than 5 per cent in 2015, its slowest pace in six years.

While many of the challenges facing Indonesia are blamed on global turmoil, the president must also contend with many domestic problems hampering the economy — a complex bureaucracy, rickety infrastructure and confusing investment policies.

The World Bank ranked Indonesia 114th in its annual "ease of doing business" survey this year.

The first stimulus package, which included such measures as tax breaks and attempts to simplify confusing regulations seen as a drag on business, failed to boost the market and rupiah.

Economists welcomed the new policies but said they would not be a silver bullet.

"This is quite a good move from the government," said Josua Pardede, an economist from Indonesia's Bank Permata.

"But the market hopes the government can do more to build confidence for portfolio investment and to boost slumping domestic consumption.”

BERLIN – Volkswagen announced plans on Tuesday to refit up to 11 million vehicles and overhaul its namesake brand to try to move on from the scandal over its cheating on diesel emissions tests.

New Chief Executive Matthias Mueller said the German carmaker would ask customers "in the next few days" to have diesel vehicles that contained illegal software refitted, a move which some analysts have said could cost more than $6.5 billion.

Europe's biggest carmaker has admitted cheating in diesel emissions tests in the United States and Germany's transport minister says it also manipulated them in Europe, where Volkswagen sells about 40 per cent of its vehicles.

The company is under huge pressure to address the worst business crisis in its 78-year history, which has wiped more than a third off its market value, sent shock waves through the global car market and could harm Germany's economy.

"We are facing a long trudge and a lot of hard work," Mueller told a closed-door gathering of about 1,000 top managers at Volkswagen's Wolfsburg headquarters late on Monday.

"We will only be able to make progress in steps and there will be setbacks," he said, according to a text seen by Reuters.

Mueller was appointed CEO on Friday to replace Martin Winterkorn. German prosecutors said on Monday they were investigating Winterkorn over allegations of fraud.

The crisis is an embarrassment for Germany, which has for years held up Volkswagen as a model of its engineering prowess and has lobbied against some tighter regulations on automakers. The German car industry employs more than 750,000 people and is a major source of export income.

Germany's KBA watchdog had set Volkswagen an October 7 deadline for it to present a plan to bring diesel emissions into line with the law.

Millions of cars

Volkswagen said previously about 11 million vehicles were fitted with software capable of cheating emissions tests, including 5 million at its VW brand, 2.1 million at luxury brand Audi, 1.2 million at Czech division Skoda and 1.8 million light commercial vehicles.

Refitting 11 million cars would be among the biggest recalls in history by a single automaker, similar in scale to Toyota's recall of more than 10 million vehicles between 2009 and 2010 over acceleration problems, though dwarfed by the number recalled by multiple carmakers due to faulty Takata airbags.

Volkswagen sold 10.1 million vehicles in the whole of 2014.

The company said last week it would set aside 6.5 billion euros ($7.3 billion) in its third-quarter accounts to help cover the cost of the crisis.

But analysts think that may not be enough, as it faces potential fines from regulators and prosecutors, as well as lawsuits from cheated customers.

Sweden's chief prosecutor told Reuters on Tuesday he was considering whether to start a preliminary investigation into Volkswagen.

Mueller also said Volkswagen's core VW division, struggling with high-fixed costs and low profit margins, would be given more autonomy, akin to the independence enjoyed by premium flagship brands Audi and Porsche.

Analysts have long urged the company to tackle the underperformance of its core mass-market brand, and in particular to dilute control from the centre which has been blamed for product delays and problems adapting to local markets.

Klaus Mohrs, the mayor of Wolfsburg where Volkswagen employs around 70,000 people, said on Monday he expected a sharp decline in business taxes as a result of the crisis, and announced an immediate budget freeze as well as a hiring ban.

The emissions scandal has sent ripples through the global car market, with manufacturers fearing more costly regulations and a drop in diesel car sales.

The European Commission is working on outline plans to reform the European system for approving new models of cars by the end of the year.

Volkswagen's Belgian importer, D'Ieteren, said it would offer engine upgrades to 800 customers who had ordered a vehicle with a diesel engine that was likely to have been fitted with illegal software. The importer said it would pay for the expected 2 million euros cost.

RABAT – Moroccan authorities have blocked the opening of IKEA's first store in the North African kingdom planned for Tuesday because it lacked a "conformity permit", a statement from the interior ministry said on Monday.

A news website close to the Moroccan palace said earlier on Monday the store was blocked because of Sweden's plans to recognise a republic sought by the Polisario Front in the Western Sahara.

The government did not elaborate on the store's permit problems. IKEA's Moroccan subsidiary told local media that the opening of the 26,000-square-metre store was canceled.

The store is based in Morocco's largest mall near the city of Mohamedia. The mall was built by a joint venture including Dubai-based Al Futtaim Group, Moroccan supermarket chain Marjane Holding and Portuguese Sonae Sierra.

Morocco has controlled most of Western Sahara since 1975 and claims the sparsely populated stretch of desert, which has offshore fishing, phosphate reserves and oilfield potential, as its own.

However, the Algeria-backed Polisario Front seeks independence, and a United Nations mission was formed more than 20 years ago ahead of an expected referendum on Western Sahara's political future which has never taken place.

Sweden and other Scandinavian countries have been supporters of Western Saharan self-determination, while France and Spain have been accused by activists and human rights organisations of supporting the Moroccan side.

Polisario's planned Sahrawi Republic was recognised by some countries mainly from the African Union, but none of the Western powers had recognised it.

The Swedish government and IKEA could not be immediately reached for a comment.

It was unclear if the block was temporary or if permits would be granted for the store in the future.

MOSCOW – Russia hopes that financing and technology from Arab states and other countries will help its firms weather the fallout from Western sanctions imposed over the Ukraine crisis, Russia's Minister of Natural Resources Sergei Donskoi said.

US and EU sanctions have hit Russian individuals and companies, including energy champions Rosneft and Gazprom, preventing them from accessing long-term financing and high-end technology.

One way that Russia, one of the world's top oil and gas producers, has tried to offset the sanctions is to boost ties with China, the global leader in energy consumption, in the hope it can wean itself off its dependency on European markets.

But Donskoi, in an interview for the Reuters Russia Investment Summit, said Moscow was also exploring other avenues.

"We have already talked about Asian countries, and of course we are also looking at European countries, which have not imposed sanctions but which have technology and equipment that could be purchased," he said.

"[But] Arab countries should be mentioned too. They have funds and, in many cases, technology."

Donskoi declined to name potential projects Arab companies were interested in, citing the sensitivity of such talks.

However, the Kremlin has said that Rosneft, the world's top-listed oil company by output, had been in talks with the UAE's Mubadala Petroleum to jointly develop two east Siberian projects, Tass Yuriakh and Verkhnechonskoye.

Sanctions have hit Rosneft's plans to tap uncharted icy Arctic waters, beneath which billions of barrels of oil and gas are thought to be hidden.

It was forced to halt its work in the Kara Sea on Russia's Arctic shelf, and ExxonMobil also had to withdraw from drilling exploration wells there. The energy ministry says it estimates Russian companies will only relaunch oil exploration drilling in the Kara Sea in 2020-2021.

Donskoi said it would be hard to judge the precise impact from sanctions on new Arctic projects, where the first oil is not expected to be pumped before 2025-2030.

While he said there had been some impact from the measures, he said minerals exploration had not yet significantly slowed.

Total investment in exploration was seen declining by 10 per cent this year, he said, down from 340 billion roubles in 2014, its highest level in 15 years.

But low oil prices meant companies were adopting a more cautious approach to long-term projects, said Donskoi, with some shifting their focus onto additional exploration work at existing sites to boost their reserves.

DUBLIN – Ireland may bring in legislation to link residential rents to the rate of inflation and temporarily control soaring rental costs, the country's environment minister said on Monday.

A severe shortage of housing in urban centres has become a big political issue ahead of elections due by early 2016, with rents in Dublin almost back at levels seen at the height of Ireland's property boom a decade ago. The spectacular bust that followed in 2008 wrecked the country's banks and economy and pushed Ireland into a now-completed international bailout.

"It's certainly something I'm in favour of as an interim measure while supply is coming up in relation to housing, and reports linking it to CPI would be accurate," Environment Minister Alan Kelly told Irish national broadcaster RTE.

"What we need to do is ensure people have certainty in the future, that there can't be immoral rent rises, and there are immoral rent rises taking place — somebody who pushes the rent up by 10, 15 per cent."

The Sunday Times newspaper said the government planned to link rents to the consumer price index (CPI) for a four-year period. Inflation was flat in Ireland on an annual basis in August after falling for eight successive months.

Ireland was left with an overall surplus of houses after a construction boom that ended with the crash, but the wrong stock was built in the wrong places, leaving property scarce in cities while out of town housing estates lie empty.

Kelly said the plan was part of discussions between his department and finance minister Michael Noonan on a package of measures in the October 13 budget to boost housing supply.

With house building at less than half the level of the 1970s when Ireland was a much poorer country, prospective buyers are stuck in the rental market as the economy recovers, pushing rents up as high as 10 per cent year-on-year in Dublin.

The rising rental costs come as the effects of Ireland's financial crisis are still being felt through high unemployment, higher taxes and lower wages.

Noonan has introduced policies to try to kickstart the housing market in his last three budgets, but they have had little impact on construction. Fewer than 7,000 homes were completed in the first seven months of this year compared to at least 21,000 the government estimates is needed to meet demand.

"The Government is currently grappling unsuccessfully with policy solutions for Ireland's ongoing housing supply shortage," Goodbody Stockbrokers wrote in a note on Monday.

"Speculation that a form of rent control is on the agenda does not bode well in our view, although we believe the limited time frame will go some way to assuage concerns."

UNITED NATIONS – As world leaders brandish a hard-fought new set of global goals designed to improve lives in all countries, the question of who foots the trillion-dollar bill remained open on Saturday as financial pledges started rolling in.

The United Nations 193 member countries on Friday adopted 17 Sustainable Development Goals (SDGs) as a roadmap to end poverty and hunger, fight inequality and conquer climate change over the next 15 years, or 800 weeks.

The goals tackling issues in both rich and poor countries replace an earlier UN action plan, the Millennium Development Goals, which focused mainly on poverty in developing nations.

While aid funds and debt relief were key for the millennium goals, there is wide recognition of the need for other sources for the estimated $3 trillion a year needed to enact the SDGs.

The World Bank, with other development banks, coined the phrase "Billions to Trillions" to illustrate the challenge.

Organisation for Economic Cooperation and Development Secretary-General Angel Gurria said private sector participation was critical while governments need to strengthen tax and regulatory systems to encourage investment.

"Without the private sector, it is not going to happen, as we have budgetary constraints in every country," Gurria told the Thomson Reuters Foundation in an interview.

"You'll have a lot of pledges but you'll need a framework to allow the flows [of finance] to then happen naturally."

A July conference in Addis Ababa addressing SDG funding issues made clear that private sector as well as philanthropic foundations had a major role to play, with private enterprise the main source of economic growth and job creation, outsizing donor nation funds.

Meanwhile, the world's richest nations again committed to a target of earmarking 0.7 per cent of gross national income for overseas development assistance — although few meet that level in practice — which now stands at about $135 billion a year.

Pledges of funding started to roll in during the UN three-day SDG summit that ends on Sunday.

UN Secretary-General Ban Ki-moon announced more than $25 billion in initial commitments over five years from 40 countries and more than 100 international organisations to help end preventable deaths of women, children and adolescents.

Contributions to boost funding for gender equality powerment included $5 million from Chinese e-commerce giant the Alibaba Group and $1 million from the Bill & Melinda Gates Foundation.

Chinese President Xi Jinping unveiled an initial pledge of $2 billion with aims to increase that to $12 billion by 2030.

Helen Clark, administrator of the United Nations Development Programmeme, said the agenda would not be achieved without business — and that meant ensuring stability and good governance in countries to support big partnerships.

"Business is attracted to where there is a solid and able environment and basic rule of law, commercial law, dispute resolution, peaceful and inclusive societies," said Clark, the former New Zealand prime minister.

"For us, it's fundamentally not about financial contributions that business makes to UN agencies. It's about shared values ... the way business does business. Is it inclusive, and is it sustainable?"

Centrepiece to funding talks has been a focus on helping countries boost their domestic resources by improving tax collection and attacking tax evasion and illicit cash flows.

While some criticise this as tinkering with a broken global tax system, Gurria said SDG funding does not need new initiatives but can build on and improve existing structures.

He called for a team of "tax inspectors without borders" to build trust in countries' systems and boost investment.

"If you get it right, you can get trillions," Gurria said.

But it is agreed that funding alone was not enough to achieve the global goals, with policy changes needed to support the priorities.

Michael Green, executive director of the Social Progress Imperative which analyses countries' progress on social measures, said economic growth alone would not meet the SDGs, which deal with subjects ranging from energy subsidies to developing genebanks.

"The SDGs are about political will and inclusion," Green told the Thomson Reuters Foundation. "We have the resources if we use them properly for this is not just about money."

JAKARTA – Indonesian teacher Nina Ramadhaniah hopes for "blessings from Allah" by opening a Sharia bank account — the sort of pious customer the world's most-populous Muslim-majority country is praying for as it launches an Islamic finance drive.

Indonesia, Southeast Asia's biggest economy, has a Muslim population of around 225 million, but this huge number of faithful has not translated into success for Sharia banks, institutions required to do business in line with Islamic principles.

Now regulators have launched a plan aimed at growing the sector, which currently accounts for less than five per cent of banking assets, compared to a quarter in neighbouring, more developed Muslim-majority Malaysia and around half in Saudi Arabia. 

Authorities believe it is a good moment, with many Indonesians getting wealthier after years of strong economic growth and an increasing trend towards piety across broad sections of society.

Many of those without bank accounts, estimated at about 40 per cent of the population, are soon expected to open one.

"The situation is an opportunity for the Islamic banking business to get bigger," said Nasirwan Ilyas, a senior official from the Islamic banking division of the Financial Services Authority (OJK). 

The OJK is spearheading the drive, and unveiled a five-year roadmap earlier this year that included plans to educate the public about Sharia lenders and the establishment of an Islamic finance committee to better manage the sector.

'Interest is haram' 

Key features of Sharia banking include the prohibition of interest on loans or customer deposits, and a ban on investing in "non-Islamic" businesses, such as those involving pork or alcohol.

For teacher Ramadhaniah, who has an account with Indonesia's biggest Islamic lender, Bank Syariah Mandiri, the ban on interest is a key attraction. 

"Charging interest is haram [against Islam], ill-gotten gains that will not bring me any blessings from Allah," the 44-year-old told AFP. "I don't want to live in sin."

Sharia accounts often work on a "profit-and-loss sharing" model, meaning customers get a windfall when the bank does well but can lose out when it does badly.

There are obvious disadvantages. Sharia lenders generally offer lower returns on investments and their modest size often means they provide fewer services than larger, conventional peers — many shops are not equipped to accept their debit cards.

Nevertheless, Islamic banks have proven popular in recent years, with the sector expanding on average more than 40 per cent a year between 2008 and 2012, according to the OJK.

The growth came after laws were changed to make it easier to establish an Islamic bank, and there are now a plethora of standalone Sharia lenders, Islamic banking units attached to conventional banks, and smaller Islamic financial institutions in the countryside.

Growth in the sector has lost steam due to a broader slowdown in the economy, which is expanding at six-year lows — giving authorities another reason to launch their drive.

Islamic mega-bank 

Central to the overhaul is a plan to set up a National Islamic Finance Committee this year, to oversee the sector by bringing together representatives from different government agencies and act as a contact point for potential foreign investors.

Currently responsibility for the sector is spread around different bodies, such as the OJK, the central bank and the finance ministry, according to the OJK's Ilyas.

It is modelled after similar bodies in other countries, such as the International Islamic Financial Centre in Malaysia, where the sector is already far more developed as the government started supporting it some years ago. 

In addition to the OJK roadmap, the government has announced plans to merge the Islamic banking subsidiaries of four state-owned banks to create an Islamic mega-bank, which should be able to provide better services than the current Islamic lenders.

While observers have broadly welcomed the plans, they concede that many difficulties remain.

Khalid Howladar, Moody's global head of Islamic finance, said it would be "quite a challenge" to grow the sector to a substantial level.

"The market is growing faster than conventional but from a very low base," he said, adding Islamic banks in Indonesia did not offer "substantive competition" to their non-Sharia peers.

But for Ramadhaniah and a growing army of devout Indonesians with new-found spending power, Islamic banks remain the only choice.

"I really don't care that I'm not earning anything or getting lower returns on my investments," she said. "I can live in peace."

BEIJING – The outlook for the global economy became bleaker on Wednesday as signs of a deeper downturn in China emerged, despite massive policy stimulus, coupled with weak growth at best in Europe.

China's vast factory sector shrank at its fastest rate in 6-1/2 years in September, a private survey showed, sending investors worried about sagging global growth scurrying out of risky assets.

Reacting to the data, Asian stocks posted their biggest single-day fall in a month on Wednesday.

Similar surveys are likely to show the US economy lost some steam in September even with the Federal Reserve holding fire on interest rates.

"There is substantial concern at present that global demand weakness is dampening the economy in the industrial countries," said Jorg Kramer, chief economist at Commerzbank.

The preliminary Caixin/Markit China Manufacturing Purchasing Managers Index fell to 47 in September, the worst since March 2009, missing expectations for 47.5 and slipping from August's 47.3. Levels below 50 signify a contraction.

It was the seventh straight month of contraction for the manufacturing sector and the survey showed business conditions deteriorating almost across the board, as firms slashed output, prices and jobs at a faster pace as orders fell.

The data underline the malaise in the world's second largest economy and just how difficult it will be for policy makers to steer the economy out of the biggest downturn in decades.

Last month, Beijing devalued the currency to support exports and boost growth, currently at 7 per cent.

But that move was seen by investors as official endorsement of a slowing economy. A global financial market rout, notably in Chinese stocks, followed and forced the central bank to cut interest rates again, the fifth time since November.

China is a major importer of raw materials, especially from Australia, South Africa and Canada, and exporter of finished goods.

A slowdown there will ring out across the world, denting demand and souring business sentiment. Last week, it figured high on a list of reasons the Fed had for not raising interest rates in the United States for the first time in almost a decade.

Sentiment at Asia's biggest companies tumbled at a record pace in the third quarter on worries about China and the risks it poses to global growth, a Thomson Reuters/INSEAD survey showed.

There are signs dwindling demand from Asia, led by China, is starting to hurt businesses in the eurozone, according to PMI survey compilers Markit.

Private business growth in the currency bloc slowed this month as Asian demand weakened, leading to fewer new jobs and forcing factories to reduce output.

The Composite Flash PMI for the bloc came in at 53.9 in September against predictions of a dip to 54.1, down from 54.3 last month. Markit said the PMIs point to third quarter growth of 0.4 per cent.

"It is hard to see euro zone growth really kicking on," said Howard Archer at IHS Global Insight.

"There is the very real risk that slowing growth in emerging markets like China not only hits eurozone exports but also has a negative impact on business sentiment and leads to a scaling back of investment and employment plans."

The big upside from the data, however, was that the dominant service industry was able to charge higher prices for the first time in four years.

That will be welcome news for the European Central Bank that is struggling to get inflation close to its target of just below 2 per cent even after six months of stimulus. Inflation was a meagre 0.1 per cent in August.

Speculation the ECB will expand its 60 billion euros a month quantitative easing programme has mounted recently and several policy makers have indicated the central bank stood ready to act if inflation dipped or failed to rise as swiftly as expected.

"Growth is too slow to generate inflation and given the likelihood of a slowdown to come, the ECB should still up the pace of its quantitative easing programme," said Jennifer McKeown at Capital Economics.

Testimony on Wednesday afternoon from ECB President Mario Draghi could give an indication of how close the bank is to acting.

Business activity in Germany, the eurozone's number one economy slowed slightly in September while activity rebounded in France as manufacturing output swung back to growth after two consecutive months of decline.