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