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Is South Korean Manufacturing Activity Slowing Down?

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Manufacturing activity in South Korea

Although South Korea’s (EWY) manufacturing activity increased in April 2017, its pace of growth slowed amid tensions with its important trading partner, China (FXI). Currently, relations between China (MCHI) and South Korea (KOR) are under pressure due to the United States’ deployment of the THAAD (Terminal High Altitude Area Defense) system in South Korea. Also, South Korea’s closer ties with the United States (SPY) (QQQ) are likely to make China uncomfortable.

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Manufacturing purchasing managers’ index

The Nikkei Manufacturing PMI (purchasing managers’ index) for South Korea rose to 49.4 in April 2017 from 48.4 in March. However, factory activity contracted for a ninth consecutive month as new orders, production, and employment slowed.

Since 2016, new export orders have dropped, as demand from China has declined. Ongoing political tensions around THAAD may have also impacted export order numbers in 2017. Work backlogs have fallen since the beginning of 2017, and purchasing activity has also fallen with inflation down to a five-month low. The manufacturing PMI in South Korea stood at an average of 49.4 between 2011 to 2017.

Future expectations

South Korea’s reliance on exports is likely to be impacted by protectionism and geopolitical tensions. According to Reuters, HI Investment & Securities chief economist Park Sang-hyun stated that “It will be difficult for exports to maintain growth in the 20-percent range, we’ll likely see growth slow a bit in the second half of the year as the base effects subside from crude oil products which drove export growth in the first quarter.”

Investors need to watch manufacturing PMI numbers as they can be indicative of the future course of economic activity in South Korea. A manufacturing PMI reading above 50 indicates an expansion of the manufacturing sector from the previous month, a reading below 50 shows a contraction, and 50 shows no change. In the next article, we’ll look at business confidence in South Korea.

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