South Korea manufacturing PMI drops 2.5 points to 54.6

The HSBC South Korea Purchasing Managers’ Index posted 54.6 in May, falling from April’s reading of 57.1. The latest figure was the lowest in five months, but nonetheless indicated a marked strengthening in business conditions. Overall growth has now been recorded for 15 successive months.

A further rise in incoming new business supported the overall improvement in business conditions. However, the rate at which new order volumes rose slowed since April. Similarly, the rate of growth of new business received from overseas markets also weakened. Anecdotal evidence suggested that demand growth had eased during the month amid fragile global economic conditions.

Nonetheless, the overall rise in new business led to a further expansion in output. The pace of production growth slowed in line with the weaker increase in new orders.

Despite the latest rise in output, backlogs continued to accumulate. Panelists noted that production capacity constraints had driven the increase in outstanding business. Stocks of finished goods fell slightly during May, with manufacturers commenting that inventories were utilized to partially fulfill order obligations.

Reflective of the further rise in new orders and accumulation of backlogs, employment within the South Korean manufacturing sector increased during May. The rate at which staffing levels rose eased since April, but remained comfortably above the long-run average for the series.

May data signaled a marked rise in purchasing activity at South Korean manufacturers. The expansion in input buying was weaker than that reported in April, in line with slower growth of output. The increase in purchasing activity, alongside shortages of certain materials, led to a modest lengthening in suppliers’ delivery times.

Input prices faced by manufacturers in South Korea increased substantially during May, and at the strongest pace in 15 months. This was driven by a further rise in raw material prices. Output prices also increased, but to a lesser extent than costs, as competition prevented a larger rise in charges.

Commenting on the South Korea Manufacturing PMI survey, Frederic Neumann, co-head of Asian Economic Research at HSBC, said: “Industrial South Korea is easing off the accelerator. The expansion remains firm, but new order growth is starting to slow. As a result, employers have also become more cautious about adding jobs. The good news is that inventories remain lean, so any pick-up in demand will quickly feed-through to a bounce-back in production. Even if price pressures are still growing, the uncertain outlook in growth will likely lead policy-makers to remain accommodative for the time being.”