South Korea’s manufacturing economy likely to continue losing momentum in 2016

South Korean December industrial output declined 1.9% y/y, slightly lower than Barclays' projection of -3% and consensus expectation of -3.3%. Industrial production, on a seasonally adjusted basis, rose 1.3% m/m after contracting m/m for two consecutive months. The industrial production in Q4 contracted 0.5%. The data also indicates that production contracted for the first time in annual terms since 2009, declining 0.7% y/y.

Meanwhile, the Federation of Korean Industries and the BOK manufacturing confidence indicators have declined sharply in January, in spite of an increased policy support. The Bank of Korea business confidence survey for February indicated a drop of 3pp to 67 on a seasonally adjusted basis, much lower than the Q4 average of 71.3.

"To us, this indicates a potentially deeper manufacturing contraction in Q1, after falling 0.5% q/q sa in Q4. This is consistent with our view that the manufacturing economy will continue to lose momentum in 2016", says Barclays.

The underlying growth momentum is expected to remain weak through early 2016 with cyclical weakness worsened by the effect of weather-induced disruptions to shipment in North Asia and the US. Meanwhile, the monetary policy is likely to be accommodative in 2016. South Korean Finance Minister Yoo said that the Q4 GDP data was "disappointing". Also, the central bank looks to be more cautious of the continuous weakness in external demand, mainly from China.

"We expect the BoK to deliver another 25bp rate cut in Q1, ahead of the National Assembly elections in April 2016. With the increasing focus on tackling weak exports, we still believe the Finance Minister will continue to target a weaker KRW, as opposed to raising fiscal spending", says Barclays.