South Korea's factory activity shrinks for seventh month but recovery in sight - PMI

© Reuters. FILE PHOTO: A worker works at a plant of Hyundai Motor in Asan

SEOUL (Reuters) - South Korea's manufacturing activity shrank at a much slower pace in July, signalling that a gradual recovery in demand is gaining momentum on easing lockdowns, although the resurgence in infections remained a risk.

The IHS Markit purchasing managers' index (PMI) rose to 46.9 in July from 43.4 in June, marking the highest reading since January. But that was still below the 50 threshold that separates growth from contraction.

The headline index reflected slower rates of decline in major sub-indexes such as output, new orders and export orders but those still remained low by historical standards.

"July data provides early signs of a turnaround across the South Korean manufacturing sector ... helped by reopening international supply chains and a gradual recovery in demand in key areas such as automotive production," IHS Markit economist Joe Hayes said.

A gauge of expectations for manufacturing output over the next 12 months jumped to 49.0, just below the threshold, but still much higher than 45.7 in June.

But exports, which account for nearly 40% of the economy, are still the biggest concern.

South Korea joined Asian peers Japan, Thailand and Singapore in recession, after the economy marked its worst decline since the Asian Financial Crisis in the second quarter.

"Perhaps the strongest signal that demand levels had fallen short of expectations was the largest rise in stocks of finished goods since the start of 2009 ... manufacturers maintained a bias towards price discounting and continued to take a cautious view on their staffing numbers," Hayes said.

The sub-index for finished goods inventory, which is often attributed to weaker-than-expected sales, jumped at the fastest pace in 11-1/2 years.

To further reduce costs, firms cut staff for a 15th straight month in July, though at a slower rate.

Monday's survey came after factory production jumped at the fastest rate since 2009 in June and much quicker than expected, adding to hopes that the worst of the coronavirus impact has passed.