October 1, 2019 / 12:41 AM / 2 months ago

South Korea September factory activity contracts for fifth month; rate cut may be needed soon: PMI

SEOUL (Reuters) - South Korea’s factory activity shrank at a sharper pace in September as trade disputes and global growth uncertainties continued to weigh on the economy, prompting cutbacks in production and employment, a private survey showed on Tuesday.

FILE PHOTO: Workers labour on a steel frame at a construction site in central Seoul, South Korea, March 25, 2016. REUTERS/Kim Hong-Ji

The Nikkei/Markit purchasing managers’ index (PMI) fell to 48.0, from 49.0 in August, remaining below the 50-point level that separates contraction from growth and marking the tenth decline in the past 11 months.

Total new orders — from at home and abroad - shrank for an 11th consecutive month and at a slightly sharper pace. But new export orders rose slightly, snapping 13th straight months of contraction.

“Notably, the stabilization in export demand did not coincide with any improvement in the total new orders, which fell further, indicating that external weakness has started to spill over into domestic markets,” said Joe Hayes, economist at IHS Markit, which compiles the survey.

Companies that were surveyed continued to report cooling demand especially from Japan, China and Europe, though the weakness in global demand were buffered by new product launches and the entrance into new markets.

With business conditions deteriorating, manufacturers slashed jobs at the fastest pace since May 2018, while business confidence were only marginally optimistic of a pick-up in production in the next 12 months, the survey also showed.

“Forward-looking indicators such as employment and business confidence, the only measure of sentiment within the PMI survey, both showed little hope for a recovery to ensue anytime soon,” Hayes said.

South Korea has been struggling amid falling exports and cooling inflation. Escalations in the U.S.-China trade war and a growing row with Japan have added to the pressure on Asia’s fourth-largest economy.

The nation’s central bank chief said on Friday that the economic growth this year would likely miss the bank’s 2.2% forecast, which is already above projections by private-sector organizations that are as low as 1.4%.

In August, the Bank of Korea (BOK) held the benchmark interest rate KROCRT=ECI steady at 1.50%, which followed a surprise rate cut in July. But it is widely expected to cut rates again at its next meeting on Oct. 16.

“Overall, latest survey data suggest that if spillover effects from the global growth slowdown are manifesting themselves in the domestic economy, the BOK may soon have to follow the current global trend of looser monetary policy,” Hayes added.

Reporting by Joori Roh; Editing by Kim Coghill

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