UPDATE 1 -S.Korea's recovery seen softening as China slows

Thu Mar 27, 2014 8:20pm EDT

Related Topics

* Feb industrial output s/adj -1.8 pct m/m vs -0.1 pct in Jan

* April manufacturing BSI at s/adj 80 vs 82 in March

* C.bank expected to keep rates low for time being

By Se Young Lee and Christine Kim

SEOUL, March 28 (Reuters) - South Korea's industrial output in February shrank for a second consecutive month while a business confidence measure fell, data showed on Friday, casting doubts on the strength of the economic recovery in the face of slowing growth in China.

The industrial output index last month fell by a seasonally adjusted 1.8 percent from January, Statistics Korea data showed, worse than a median 0.2 percent drop tipped from a Reuters survey and following a revised 0.1 percent loss in January.

The country's central bank said separately its manufacturing business survey index for April outlook edged down to a seasonally adjusted 80, a seven-month low and a second consecutive monthly drop.

These two readings suggest the recovery in Asia's fourth-largest economy was losing some of its momentum since the beginning of this year amid growing signs of slowing growth in China, the largest export market for South Korea.

Still, analysts expect exports to improve this month as the median forecast from a Reuters survey of 13 analysts tips exports in March to post an annual 4.5 percent gain, up from a 0.7 percent rise for the January-February period.

The finance ministry also said in a statement it expects manufacturing output to rebound in March due to the launch of new products as well as stronger overseas shipments.

The Bank of Korea is widely expected to keep interest rates low over the near term to ensure that a recovery is firmly entrenched. The central bank expects economic growth to accelerate to 3.8 percent this year from 3.0 percent in 2013.

"The weak numbers today suggest that it will be difficult for the Korean economy to sustain the strong growth momentum as in 4Q 2013," said Ronald Man, economist at HSBC in Hong Kong. "This provides reasons to be cautious on the economic outlook, and supports our below consensus 2014 GDP call of 3.2 percent."

While relatively solid gross domestic product growth in recent quarters suggested the need for additional rate cuts had diminished considerably, renewed worries about a rapid slowdown in China have heightened uncertainty about local manufacturers' prospects.

South Korea's industrial output grew in the past two quarters, tracking a similar pickup in exports as global conditions improved. Stronger demand from advanced economies such as the U.S. has been a key driver behind these improvements.

The central bank has the room to maintain an accommodative policy stance as price pressures remain subdued. Median forecast from the Reuters poll tips March's annual consumer inflation at 1.4 percent, well below the target band of between 2.5 percent and 3.5 percent.

Domestic demand also remains modest, with private consumption failing to pick up momentum despite signs of greater optimism seen in the Bank of Korea's consumer confidence index and continued job growth.

This suggests that inflation will remain manageable in the absence of any major external shocks, giving the central bank the necessary policy room to spur growth without worrying about stoking price pressures.

South Korea's average annual growth in the past six years has slowed to 3.2 percent, down sharply from the average of 4.9 percent seen between 2000 and 2007.

South Korea will publish its March consumer inflation and exports data on April 1. The central bank will also release its advance estimates for first quarter gross domestic product growth on April 24.

(Editing by Shri Navaratnam and Choonsik Yoo)

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