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

A factory is seen in Incheon. South Korea's industrial production fell by a seasonally adjusted 2.4 per cent in August to post the biggest decline in 19 months.
A factory is seen in Incheon. South Korea's industrial production fell by a seasonally adjusted 2.4 per cent in August to post the biggest decline in 19 months.PHOTO: REUTERS

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

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

The August reading follows a revised 1.3 per cent increase in July, versus a preliminary 1.4 per cent 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 led a sharp fall in August car production, putting the company's earnings and sales targets at risk.

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

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 per cent 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 (S$3.09 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 per cent.

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 per cent 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 per cent in seasonally adjusted terms on-month after a revised 0.3 per cent 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.