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South Korea factory output falls at fastest pace in 19 months, misses expectations
September 29, 2016 / 11:27 PM / a year ago

South Korea factory output falls at fastest pace in 19 months, misses expectations

SEOUL (Reuters) - South Korea’s industrial production fell by a seasonally adjusted 2.4 percent in August to post the biggest decline in 19 months, hit by strikes at car factories.

A factory is seen in Incheon, South Korea, May 30, 2016. REUTERS/Kim Hong-Ji/File Photo

The drop is the sharpest since January 2015 when the index fell 3.5 percent on monthly terms, and far more severe than the 0.5 percent fall estimated by analysts in a Reuters poll. It rose 2.3 percent from a year earlier.

The August reading follows a revised 1.3 percent increase in July, versus a preliminary 1.4 percent gain reported earlier.

Meanwhile, the Nikkei/Markit purchasing managers’ index of South Korea’s manufacturing activity fell to a 14-month low of 47.6 in September on seasonally adjusted terms, underscoring a fragile economic recovery.

Factory output has fallen in a majority of months this year, reflecting waning global demand.

Nationwide strikes at Hyundai Motor Co. (012330.KS) led a sharp fall in August car production, putting the company’s earnings and sales targets at risk.

Car production fell 17.7 percent from July, driving the manufacturing index down. Output of semiconductors fell 5.2 percent, while that for nonmetallic minerals rose 4.4 percent.

A finance ministry official said one-off factors such as the strikes were major reasons for the drop, noting the monthly fall would only be about 0.3 percent if car production was excluded.

Finance Minister Yoo Il-ho said earlier this week the strikes at Hyundai from July this year have caused cumulative losses of nearly 2.5 trillion won ($2.28 billion).

A combination of uncertainties including potential provocations from North Korea, policy changes by the Federal Reserve and the ongoing corporate restructuring at home spelled trouble for growth sentiment, a separate statement from the ministry said.

    Friday’s data, as well as September shipment figures due Oct. 1, will be a major factor in forming market expectations of whether the Bank of Korea will decide to cut its interest rate from the current record low 1.25 percent.

    Although output indicators are down, the BOK is likely to pay more attention to “household debt and external factors” unless economic indicators deteriorate significantly, said Chae Hyun-kee, economist at KTB Securities. He added that market expectations for further policy easing had weakened.

    Retail sales increased 2 percent from July in a sign that domestic demand is improving, which supports Chae’s observation that rate cut calls are waning.

    Service sector output grew 0.7 percent in seasonally adjusted terms on-month after a revised 0.3 percent decline in July.

    Minutes from the central bank’s September rate meeting displayed a more hawkish tone than in previous months as the BOK left the key rate unchanged, suggesting a cut may not be as imminent as some market players have projected.

    Reporting by Cynthia Kim and Christine Kim, additional reporting by Dahee Kim; Editing by Sandra Maler and Eric Meijer

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