By Min Joo Kang, Senior Economist, South Korea and Japan
High-End Chip Output Boosts Manufacturing
Korea’s manufacturing industrial production experienced a strong rebound in August, with a month-on-month growth rate of 5.5% (compared to -2.0% in July and a market consensus of 0.2%). The significant increase in output was primarily driven by the semiconductor industry, with a remarkable 13.4% rise in high-end chip production. This surge compensated for the decline in legacy DRAM production. While the high demand for high-end chips is expected to continue driving growth, oversupply and inventory management remain challenges for the industry.
GDP Outlook and Chip Production
Despite the positive industrial production figures, the overall GDP growth rate is anticipated to slow down in the coming quarters. However, the recent growth trend in chip production indicates a potential bottoming out of the industry. As global demand for AI technology continues to surge, semiconductor production is expected to remain on an upward trajectory. However, the struggling legacy DRAM market, characterized by low prices and excess inventory, may impede the overall growth of the industry in the long run.
All Industries Rebound, Encouraging Yet
In August, all sectors of the economy showed positive growth, contributing to an overall increase of 2.2% in industrial output compared to the previous month. The service sector experienced a 0.3% growth for the third consecutive month, with significant gains seen in leisure activities (6.2%) and restaurants (3.6%). The summer holiday season, coinciding with the relaxation of COVID-19 measures, played a key role in driving this growth. The construction sector witnessed a 4.4% rise, boosted by the completion of a major plant project. However, residential construction is expected to decline in the coming months, which may pose challenges for the industry. Consumption, on the other hand, decreased by 0.3% due to the expiration of a tax cut program for car purchases, leading to a decline in car sales. Nevertheless, the government’s shopping voucher program during the Chuseok holiday is expected to stimulate temporary consumption growth in September. Despite these positive developments, the pace of GDP growth is projected to slow down compared to the second quarter.
Manufacturing PMI Indicates Modest Improvement
The manufacturing purchasing managers’ index (PMI) for Korea rose to 49.9 in September, indicating a modest improvement from the previous month’s figure of 48.9. The increase in output and new orders contributed to this positive trend. However, the PMI has remained below the neutral level for 15 consecutive months, indicating an ongoing contraction in the manufacturing sector. Local business surveys further emphasize concerns over weak domestic and global demand, while elevated inventory levels continue to burden production. Therefore, the recent rebound in industrial production is expected to be temporary and may not be sustained in the future.
Bank of Korea’s Outlook
The Bank of Korea’s monetary policy is expected to remain on hold in October, supported by better-than-expected industrial production data. With dairy product and public transportation fee increases scheduled for October, inflation is likely to remain above the 3% range until the end of the year, posing a concern for the central bank. However, due to signs of slowing domestic growth and increasing financial pressures on businesses and households, the central bank may not consider a further rate hike of 25bp even if the Federal Reserve conducts a final rate hike later this year.
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