South Korean manufacturing wilts in inventory overhang

[BENGALURU] The inventory overhang weighing on South Korean manufacturers has eased slightly as key electronics and auto exports see some signs of recovery, but inventories are still hovering near seven-year highs as overseas demand - particularly from China - remains soft.

The ratio of manufacturers' inventories to shipments slipped to 1.28 in August from 1.29 in July, the latest data from Statistics Korea shows.

Inventories might have eased further in September, with electronics and auto industries posting a small year-on-year export growth for the first 20 days of September. Prospects remain uncertain though, with China on an uneven growth path while Europe has yet to regain momentum, economists say.

Manufacturers, conscious of the inventory overhang, have reined in production as they de-stock. Manufacturing activity has contracted for seven consecutive months, the Nikkei/Markit purchasing managers' index (PMI) for September shows.

As production lines slow, expansion plans will likely be shelved or postponed. Capital expenditure in the manufacturing sector may fall about 36 per cent in the next 12 months, according to Thomson Reuters StarMine.

The impact on employment is so far muted.

Manufacturing accounts for a relatively small proportion of the South Korean labour market.

The services sector, which is responsible for almost two-thirds of the economy, has performed well in comparison, aided by recent interest rate cuts and higher consumer spending.

For one or two quarters, the services sector should be able to offset some of the slack in manufacturing, said Ma Tieying, economist with DBS Bank in Singapore.

Over the longer term, however, the services sector will be unable to compensate for the slowdown in manufacturing, economists say.

Services are strongly influenced by the performance of big exporters such as Samsung Electronics , Hyundai Motor and Hyundai Heavy Industries through their spending on hiring, wages, investment and share dividends.

On Thursday, the central bank cut its economic growth forecast for 2015 and 2016.

REUTERS