South Korea data shows uneven economic recovery, suggests steady rates

10:43 pm Thursday, March 30th, 2023

By Choonsik Yoo

SEOUL (Reuters) -South Korea’s factory output slumped while retail sales jumped in February, data showed on Friday, signalling an uneven economic recovery and bolstering the market’s view that the central bank will keep rates on hold for the rest of the year.

The industrial output index fell 3.2% in February from the month before after a 2.4% gain in January, while the retail sales index jumped 5.3% month-on-month after a 1.1% drop in January, according to Statistics Korea.

“The figures were extremely volatile in both January and February, but overall, the economy appears to be holding firm and could avert contraction during this quarter,” said Oh Suk-tae, economist at Societe General Securities in Seoul.

“Still, I don’t think the situation is improving so much as to change our view that the Bank of Korea’s tightening cycle is over,” he added.

South Korea’s central bank, which started raising interest rates in August 2021 ahead of most central banks, has raised the policy rate by 300 basis points from just 0.5% but kept it unchanged at its latest meeting in February.

Bank of Korea Governor Rhee Chang-yong told reporters after the February decision that the central bank would not resume its rate hikes if inflation continued to moderate.

The sluggish factory output reading for February was led by semiconductors and automobiles, with production dropping 17.1% and 4.8%, respectively, more than offsetting gains in chemicals and industrial machinery, the data showed.

Economists said the robust retail sales data could be temporary given the worsening outlook for exports, which influence a wide range of economic activity in South Korea.

The country’s exports, which rely heavily on demand from China as well as global demand for semiconductors, are forecast to suffer their worst decline in nearly three years in March, according to a Reuters poll of economists.

(Reporting by Choonsik Yoo; Editing by Shri Navaratnam, Jacqueline Wong and Edmund Klamann)