Korea: Manufacturing sector downturn deepens in July
August 1, 2019
The Nikkei and IHS Markit manufacturing Purchasing Managers’ Index (PMI) fell to 47.3 in July from 47.5 in June, falling further below the 50-point threshold that separates expansion from contraction in the manufacturing sector and only a notch above February’s over three-year low. July’s decline represents the eighth deterioration in business conditions in the last nine months.
The worse print in July came amid falling domestic and external demand as new orders fell for the ninth consecutive month. Export sales had a particularly poor performance, falling at the fastest pace in nearly six years as the prolonged U.S.-China trade dispute and the global trade slowdown continued to erode demand for Korean goods. Consequently, manufacturers slashed production sharply, with respondents noting concerns over the health of the domestic economy a key reason for cutting output. In response to anemic demand, goods producers worked through outstanding business at the fastest pace in in four years, while inventories were depleted to fulfill backlog order requirements. Subsequently, manufacturers continued to shed jobs and scale back purchasing activity at the fastest clip in over four years.
In terms of prices, manufacturers lowered output prices as incentive to draw new business, and despite slightly higher input cost inflation.
Finally, businesses were notably more pessimistic in July, as the outlook for production turned negative for the first time since the index’s inception in 2012. Respondents highlighted the trade row with Japan as a main concern, alongside increased competition from China and lingering global economic weakness.
Commenting on July’s dreary result, Joe Hayes, IHS Markit economist stated: "“There was no respite for South Korean goods producers at the start of the third quarter, as latest PMI data signalled a deeper downturn in the manufacturing sector. […] the business outlook turned negative for the first time since sentiment was tracked in 2012, as firms anticipate trade frictions and a testing domestic economy to persist over the next 12 months.”
Author: Lindsey Ice, Economist