South Korean manufacturing growth slowed for second straight month

The HSBC South Korea Purchasing Managers’ Index posted 53.3 in June, falling from May’s reading of 54.6. The latest figure indicated a solid strengthening of business conditions in the South Korean manufacturing sector, albeit to the weakest extent since December 2009. Overall growth has now been recorded for 16 successive months.

The fall in the headline PMI was underpinned by slower new order growth during June. Nonetheless, the latest increase in incoming new business remained marked. New orders received from overseas rose for a 16th successive month, although the latest pace of expansion was the slowest in the first half of 2010.

The overall rise in incoming new business supported a further increase in output. Whilst easing for a second consecutive month, the rate of growth in production remained above the historical average for the series.

Nonetheless, backlogs of work rose again in June, extending the sequence of sustained accumulation to six months. Reflective of weaker growth in new orders, the increase in outstanding business also slowed since May. Moreover, finished goods stocks were depleted for a second successive month, with panelists indicating that they had utilized inventories in order to partially fulfill new order obligations.

Employment within the South Korean manufacturing sector increased during June. Whilst the extent of the rise in staffing levels eased since May, the latest increase was the sixteenth in successive months, and still above the long-run average for the series.

Purchasing activity increased again in June. However, in line with slower output growth, the pace at which input buying rose weakened. Suppliers’ delivery times lengthened for a second successive month, albeit marginally.

Input costs faced by manufacturers in South Korea increased further in June, driven by rising raw material prices and unfavorable exchange rate variations. However, the rate of input cost inflation slowed since May. Output prices increased for a sixth successive month, and at the fastest pace since November 2008.

Commenting on the South Korea Manufacturing PMI survey, Song Yi Kim, economist at HSBC in Asia, said: “South Korea's economy is entering a normalization phase. After surging ahead, new export orders are slowing, even if still expanding. Employment growth is also cooling, but should still be sufficient to lower the unemployment rate further, supporting decent income growth and thus consumption spending. Meanwhile, input prices are easing due to softer global commodity prices, but output prices are still rising on the back of resilient domestic demand. Thus, the Bank of Korea is likely to begin its exit from extreme accommodation with a rate hike in the third quarter.”