South Korea's PMI rises, but little to cheer

Manufacturing PMI came in better than expected. The headline index posted 50.7 in Dec15, up from 49.1 in Nov15 and higher than the 50 level for the first time since Feb15. The improvement was primarily contributed by the increase in new businesses in the domestic market. Foreign demand continued to decline on the other hand, with new export orders falling for the 10th month in a row. 

The modest rise in PMI for a single month doesn't represent a meaningful and sustainable recovery in manufacturing activities. The external outlook remains challenging - the risk of China's slowdown continued to increase and the USD financing costs have started to rise. In light of sluggish demand from China and other emerging markets, Korea's exports contracted -13.8% (YoY) in Dec15, a deeper decline than -4.8% in Nov15. 

Domestic demand is the main driver on economic growth for the time being. But the momentum may slow in the quarters ahead as the policy stimulus effects will eventually wane. The latest data showed that retail sales growth has peaked, consumer confidence retreated, although loan growth and construction investment remained strong. 

Downside risks to the growth outlook remain significant. But this doesn't mean the Bank of Korea will initiate a fresh easing cycle. The BOK has kept rates unchanged at 1.50% during the past half a year after the last cut in Jun15. Since then the governor has repeatedly said that structural reforms are the best way to address low growth and low inflation, and cautioned against the side effects of an extremely loose monetary policy (e.g., household debt expansions, capital outflows). 

"Unless the economy deteriorates sharply and the need for supporting growth becomes the top priority, we think the BOK will refrain from further easing this year", notes DBS Group Research.