UPDATE 2 -S.Korea factory output jumps, cenbank seen easing to spur growth

Tue Jul 29, 2014 11:45pm EDT

Related Topics

* June industrial output +2.9 pct m/m (Reuters poll: +0.7 pct)

* Output growth highest since September 2009

* Government takes stimulus steps, rate cut looms

* July exports, inflation data to show shaky recovery (Recasts with July exports, inflation outlook)

By Christine Kim and Choonsik Yoo

SEOUL, July 30 (Reuters) - South Korea's June industrial output grew at its fastest clip in nearly five years, but analysts say sluggish exports and weak domestic demand will likely force the central bank to cut rates for the first time in more than a year, perhaps as early as next month.

The positive industrial production data was joined by other data released on Wednesday showing growth in retail sales and construction spending, calming fears about a deepening slump in the economy.

However, much still depends on the strength of global demand as shipments from Asia's fourth-largest economy have remained tepid for much of the year, reflecting an uneven global recovery and a slowdown in China.

With risks to the economy increasing amid weak domestic demand, the government moved into action last week, offering stimulus measures including $11 billion in public spending and easing of mortgage borrowing restrictions.

Most analysts are now forecasting the central bank to cut its benchmark rate by a quarter percentage point to 2.25 percent next month, in solidarity with the government's stimulus steps - which would be the first easing since May last year.

"The Bank of Korea will cut interest rates at least in the context of policy coordination with the government," said Moon Jung-hui, economist at KB Investment & Securities. "I think it will be a one-off cut."

Policymakers will take some comfort from South Korea's factory output in June, which blew past expectations to rise by seasonally adjusted 2.9 percent on the month, recouping a revised 2.8 percent fall in May.

Statistics Korea data showed it was the sharpest gain since a 3.7 percent rise in September 2009 and beat even the highest forecast for 2.0 percent growth in a Reuters survey of 16 analysts. The median forecast was for 0.7 percent expansion.

Data on domestic demand released at the same time also showed the economy improved across the board in June, though a separate central bank survey pointed to still-soft business confidence.

"Whether this sturdy performance will carry on into the third quarter has yet to be seen, but right now, when you consider the dollar/won rate has passed its low point, exports will pick up and so will (economic) growth," said Kim Doo-un, economist at Hana Daetoo Securities.

"We see 1.2 percent growth for the third quarter GDP," he added.

EXPORTS SLUGGISH

The main focus remains on an underperforming export sector, and data later this week on July exports and inflation are likely show the economic recovery remains fragile.

South Korea's economy expanded by a slower-than-expected 0.6 percent in the second quarter from the previous quarter as private consumption shrank due to ripple effects from April's ferry accident, central bank data showed last week.

"Exports have historically been the key driver for Korea's economic engine and there's no reason to think this year is different," said Ronald Man, economist at HSBC in Hong Kong, adding effects on growth from the latest stimulus measures would be limited overall.

South Korean exports this month are forecast to grow 4.7 percent from a year ago, accelerating from a 2.5 percent gain in June, a Reuters survey of analysts showed. But the pace would still be too slow to ensure a sustained recovery: For much of the years between 2003 and 2011, Korean exports grew at a double-digit rate.

South Korea sends one-quarter of total exports to China but the recent slowing in the world's second-largest economy and an uneven recovery globally have hurt overseas sales.

Inflation staying low for an unexpectedly long period was underscored by depressed consumer sentiment. Analysts in the Reuters survey expect South Korea's July inflation to ease to 1.6 percent on an annual basis from 1.7 percent in June.

The central bank has a target of keeping inflation at between 2.5 percent and 3.5 percent. The low inflation environment and government stimulus both support the market's view a rate cut from the Bank of Korea is imminent. The next policy review is on Aug. 14.

The government will release export and inflation data for July on Friday.

(Editing by Shri Navaratnam)

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