South Korean factory output jumps

Industrial production up sharply but sluggish exports, soft demand may force interest rate cut

PUBLISHED : Wednesday, 30 July, 2014, 3:39pm
UPDATED : Thursday, 31 July, 2014, 6:13pm

South Korea's industrial output grew at its fastest clip in nearly five years last month, but analysts say sluggish exports and weak domestic demand will likely force the central bank to cut rates for the first time in more than a year, perhaps as early as next month.

The positive industrial production data was joined by other data showing growth in retail sales and construction spending, calming fears about a deepening slump in the economy.

However, much still depends on the strength of global demand, as shipments from Asia's fourth-largest economy have remained tepid for much of the year, reflecting an uneven global recovery and a slowdown in China's economic growth.

Most analysts are now forecasting the central bank will cut its benchmark rate by a quarter percentage point to 2.25 per cent next month which would be the first easing since May last year.

"The Bank of Korea will cut interest rates at least in the context of policy coordination with the government," said Moon Jung-hui, an economist at KB Investment & Securities. "I think it will be a one-off cut."

Policymakers will take some comfort from South Korea's factory output in June, which beat expectations to rise by a seasonally adjusted 2.9 per cent on the month, recouping a revised 2.8 per cent fall in May. Statistics Korea data showed it was the sharpest gain since a 3.7 per cent rise in September 2009.

Data on domestic demand also showed the economy improved across the board last month, though a separate central bank survey pointed to still-soft business confidence.

The main focus remains on an underperforming export sector, and data later this week on July exports and inflation are likely show the economic recovery remains fragile.

South Korea's economy expanded by a slower-than-expected 0.6 per cent in the second quarter from the previous quarter as private consumption shrank owing to ripple effects from April's ferry accident.

"Exports have historically been the key driver for Korea's economic engine, and there's no reason to think this year is different," said Ronald Man, an economist at HSBC in Hong Kong.

South Korean exports this month are forecast to grow 4.7 per cent from a year ago, accelerating from a 2.5 per cent gain in June.

South Korea sends a quarter of its total exports to mainland China but the recent slowing in the growth of the economy and an uneven recovery globally have hurt overseas sales.

Inflation staying low for an unexpectedly long period was underscored by depressed consumer sentiment. Analysts in a Reuters survey expect South Korea's inflation to ease to 1.6 per cent on an annual basis this month from 1.7 per cent in June.