South Korean manufacturing sector regained momentum in December

December survey data, compiled by Markit for HSBC, indicated a solid improvement of business conditions in the South Korean manufacturing sector. The HSBC South Korea Purchasing Managers' Index (PMI) posted 53.9 in December, a solid improvement on November’s 50.2. The latest reading signaled the fastest growth of the South Korean manufacturing sector in seven months, and was above the long-run series average.

After accounting for seasonal factors, new orders received by manufacturers increased markedly during December. Anecdotal evidence suggested that a general improvement in economic conditions had boosted demand, particularly in the domestic market. New export orders also increased solidly during the month, and at the strongest pace since June.

The growth in overall new orders supported a marked rise in output at manufacturing companies in South Korea. Despite this, backlogs of work increased in December, indicating that pressure on operating capacity had returned. Furthermore, stocks of finished goods fell as companies used existing inventories to partially meet new order obligations, as well as for stock reduction initiatives.

December data signaled a solid rise in employment in the South Korean manufacturing sector. Moreover, the latest increase in staffing levels was the sharpest in five months, reflecting marked growth of both new orders and output during the month. Employment has increased in each survey period since March 2009.

Having been broadly flat in November, purchasing activity at South Korean manufacturers rose during December. The expansion in production drove the increase in input buying. Subsequently, suppliers’ delivery times were reported to have lengthened, as growth in purchasing activity placed pressure on capacity at vendors. Stocks of purchases continued to fall, despite the rise in input buying.

Input prices faced by manufacturers in South Korea increased substantially during December, driven by higher raw material costs. The latest input price inflation was the fastest since February 2009. Output prices also rose during the month. Whilst the increase in charges was marginal compared to that of costs, it was notably sharp in the context of historical data.

Commenting on the South Korea Manufacturing PMI survey, Song Yi Kim, economist at HSBC in Asia, said: “The Korean economy is ending 2010 on a strong note. With the global trade cycle firing up again, Korea especially stands to benefit. While exports are accelerating again after a recent lull, the labor market is strengthening as well, which should help underpin consumption spending for the coming quarters. Still, the Bank of Korea needs to heed growing price pressures: with both the input and output price indices up sharply, it is only a matter of time before official inflation readings begin to threaten the central bank’s target.”