South Korea factory activity returns to contraction; coronavirus casts shadow

A photo of the Samsung Electronics 'Nano city Hwasung Campus' semiconductor factory in South Korea on Nov 19, 2019. PHOTO: AFP

SEOUL (REUTERS) - South Korea's factory activity slipped back to contraction in January on weak domestic sales, a private business survey showed on Monday (Feb 3), suggesting persistent pressure on an economy struggling to regain its footing.

Worryingly, the latest survey didn't reflect the outbreak of a rapidly spreading new coronavirus in China that has claimed scores of lives, disrupted travel and tourism across many countries and stoked fears of a broad hit to global growth.

The Nikkei/Markit purchasing managers' index (PMI) fell to 49.8 last month, down from 50.1 in December which was the first time in eight months it had gone above the 50-point level that separates growth from contraction.

Despite the latest decline in the headline figure, new export orders recorded its second successive month of growth albeit at a slightly slower pace, marking the first back-to-back expansion since July 2018.

The positive export trend reflected easing US-China trade tensions and some improvement in trade relations with Japan, the survey showed.

Total new orders also grew for a second month, but again at a slower rate due to unfavourable demand at home.

"While better export conditions will be a relief, a deteriorating domestic economy will put pressure on the Bank of Korea to inject another round of stimulus," IHS Markit economist Joe Hayes said.

Asia's fourth-biggest economy could also face more pressure in the coming months from China's coronavirus epidemic, which many analysts warn will be a drag on growth both in China and worldwide.

In June 2015, the Bank of Korea cut interest rates in a pre-emptive move as policymakers raced to limit the economic fallout from the deadly Middle East Respiratory Syndrome virus outbreak.

For now, though, the BOK feels it is premature to respond to the potential impact from China's new virus. The central bank cut rates twice last year to temper pressure from faltering global demand amid the Sino-U.S. trade war.

The latest PMI showed staffing level declined for the ninth consecutive month in January on retirements, voluntary resignations and company restructuring.

While business sentiment for the next 12 months surged to a 22-month high, the China virus scare could hurt confidence if the death toll keeps rising and business disruptions continue for a while longer.

Data on Saturday showed South Korean exports fell sharper and for a 14th month in January, partly as fewer working days outweighed improving global demand for semiconductors. The trade ministry said shipments may be affected from February if risks from the virus threat lingers.

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