, Korea

Korea manufacturing inched up 3.3%

January growth is first in months but it has a long recovery road ahead, says Morgan Stanley.

Month-on-month, Korean industrial production grew 3.3% in January from the 0.7% decline in December 2011, breaking four months of consecutive contractions.

But dangers still lurk. Private consumption growth is in a tailspin and companies are still playing conservative with their capex investments, both of which could derail manufacturing growth.

Here's more from Morgan Stanley:

Quick Comment: On a working-day adjusted sequential basis, Korea's industrial production increased 3.3% MoM in January, compared to -0.7% MoM in December, which was the first MoM gain in four months. On YoY basis, industrial production showed a decline of 2.0% YoY in January due to the distortion of Lunar New Year holidays (LNY). It was above our expectation of -4.0% YoY and consensus of -4.6% YoY. The stronger-than- expected industrial production was indeed a pleasant surprise to us, and we think it could be caused by manufacturers speeding up production activity ahead of the LNY holidays. Shipments were also slightly positive, up 3.4% MoM in January on a seasonally adjusted basis (vs. 0.4% MoM gain in December). Meanwhile, producers’ inventory was down 2.7% MoM (vs. the gain of 2.4% MoM in December), which was the first decline in 12 months. The capacity utilization ratio rose to 80.6% in January (vs. 77% in December) as a result of the stronger production in the month, the first time it stood above 80% in seven months.

Slightly positive equipment investment activities in January: On a seasonally adjusted basis, the monthly equipment investment index increased 7.8% YoY in January (vs. the decline of 1.1% in December), the first YoY gain in seven months. It was mainly driven by the rise in machinery investment (up 12.1% YoY), while transport equipment was weak (down 15.8% YoY). The slightly positive equipment investment echoed the Business Survey Index, which marked 100.9 points on actual business condition in February (vs. 96.5 points in January), a recovery for the second consecutive month.

Construction orders rose in January: The growth of construction orders rose to a three-month high at 42.8% YoY in January (vs. 15% in December). Both public and private construction orders had a good performance in January, up 48.4% YoY (vs. 47.6% in December) and 69.4% YoY (vs. 0.1% in December) respectively. As Korea's overall economic growth is decelerating in recent quarters, we expect the government to continue supporting the construction sector in the election year of 2012. Further relaxation of the property market rules is also likely, given that the overall sentiment on the housing market stays weak and transaction volumes are low, but even so we note that it would be just neutralizing the stringent policies.

Service sector output continued to decelerate, indicating weak domestic economy: Service sector output increased 0.9% YoY in January (vs. 1.6% in December), the slowest growth in ten months. In particular, real estate, lodging and culture/sports services declined 12.6% YoY, 4.7% YoY and 3.9% YoY respectively. On the other hand, professional/tech/ science which was up 4.9%, telecom up 4.9% and social services up 4.8% YoY, showed relatively resilient performances. We think Korea's service sector output could remain weak in the next one to two quarters, due to slowed household income growth and weak domestic consumption.

Not a solid recovery yet: Private consumption growth continued to decelerate, due to slower income growth, tightened consumer credit and weak business sentiment. There is still no confirmed sign that corporates have started to raise their capex investment given the external weaknesses. While exports were not affected as much as other economies in the region (such as Taiwan and Japan), they are also decelerating with slowed exports to China and Europe. Meanwhile, the international oil price remained high in recent weeks due to geopolitical risks in the Middle East, which could mean upside inflation risks for Korea. Therefore, we think the slight rebound in January production was not a recovery sign yet. We expect that solid economic recovery could kick in starting from 2Q this year.

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