South Korea’s industrial output slumped in May, with production losses across key automobile, semiconductor and machinery sectors prompting analysts to trim their year-end economic growth forecasts and bringing another rate cut into view.
Hit by a deadly respiratory virus and weak global demand, industrial output in Asia’s fourth-largest economy fell a seasonally adjusted 1.3 percent in May from April, the third monthly decline and almost double the median 0.7 percent predicted in a Reuters survey of economists.
Tuesday’s gloomy data follows a downwardly revised 1.3 percent fall from April and analysts expect further weakness as domestic consumption was hit hard this month by the spread of Middle East Respiratory Syndrome.
Data earlier in the day showed business sentiment for July hit its lowest in over six years.
“The industrial sector isn’t bouncing back as expected, with weak overseas demand partly to blame. Local service activity also wasn’t quite as robust through May as hoped. It all points to the need for further stimulus,” said Frederic Neumann, co-head of Asian Economic Research at HSBC, who expects another rate cut in the third quarter.
The rapid loss of momentum prompted the central bank to cut interest rates for the second time this year, and the government is to deliver extra fiscal stimulus worth over $13 billion via a supplementary budget.
Following Tuesday’s data, ING downgraded their full-year growth forecast from 3.0 percent to 2.5 percent while projecting a rate cut in the July-September period. Joining the chorus of cautionary voices, Nomura said the output data put downside risks to its 2.5 percent growth forecast for 2015.
The government and central bank currently are picking economic growth at 3.1 percent this year.
In May, South Korean shipments suffered their worst performance in nearly six years. A Reuters survey forecast exports to fall for a sixth straight month in June, pressured by a worrying slowdown in China which has put the brakes on exporters in many other regional economies.
Tuesday’s data showed manufacturing companies were operating their plants at only an average of 73.4 percent of capacity in May, the lowest since the same 73.4 percent rate set in May 2009.
Service-sector output also slipped a seasonally adjusted 0.4 percent in May on a monthly basis, the biggest fall since January.
“Korea faces the dual challenges of subdued local and external demand. The former should ease as MERS vanishes from the headlines. But the latter is proving stubbornly protracted,” HSBC’s Neumann said.
($1 = 1,119.3100 won)