South Korea's industrial output unexpectedly fell in November

Industrial output unexpectedly fell 0.3% y/y in November, much weaker than expected (Consensus: 1.6%). On a seasonally adjusted m/m basis, IP fell 2.1%, the second consecutive m/m contraction (Oct: -1.3%; Sep: +2.3%). The underperformance was driven by electronics, which gave back some of its earlier gains. On a m/m basis, production of semiconductors fell 9.7% (Oct: -1.3%, Sep: +17.6%) and production of mobile devices dropped 20.2% (Oct: +9.1%; Sep: -4.6%). 

Moreover, the capacity utilization rate extended its decline and dropped to 72.7% (Oct: 73.9%; Sep: 75.2%), reaching the lowest since April 2009. The issue of inventory overhang also showed no signs of improvement, with the inventory/shipment ratio remaining close to the 1.30x peak reached during the global financial crisis. Indeed, the IS ratio ticked up to 1.29x in November after edging down to 1.28x in September and October. 

In the absence of a meaningful festive season lift, the slower-than-expected inventory clearance, coupled with weaker external demand, continues to hurt producers' confidence, making manufacturers reluctant to expand production. All in, it is believed that the broad trend of weak external demand but stronger domestic services activity remains unchanged. The softness in trade and production is likely to keep the BoK's monetary stance accommodative into 2016.