S.Korea factory activity shrinks again, new orders suffer steepest slump in 5 years, PMI shows

South Korea's manufacturing sector contracted for the fourth consecutive month in May, with the PMI edging up slightly to 47.7, remaining below the 50 threshold indicating expansion. The contraction is attributed to weak domestic demand and the impact of U.S. tariffs, leading to the steepest fall in new orders since June 2020 and a sharp drop in output; however, manufacturers expressed modest optimism driven by hopes of easing global trade tensions.

Analysis

South Korea's manufacturing sector continued its contraction for a fourth consecutive month in May, as indicated by the S&P Global Purchasing Managers Index (PMI) which, despite a marginal increase to 47.7 from April's 47.5, remained firmly below the 50-point threshold separating growth from contraction. This persistent weakness is primarily attributed to frail domestic demand and the adverse effects of U.S. tariffs, impacting both the home market and key export destinations. The severity of the situation is underscored by the steepest contraction in new orders since June 2020 and the quickest decline in factory output in over two-and-a-half years. These challenges, compounded by a global trade war, recent wildfires, and political turmoil, contributed to an unexpected economic contraction in the first quarter. In response, the Bank of Korea has taken accommodative measures, cutting interest rates for the fourth time in its current easing cycle and significantly revising its economic outlook for the year downwards to 0.8%, citing risks from U.S. tariff policy and a sluggish construction sector. Backlogs of work also saw a pronounced depletion. Despite these headwinds, manufacturers expressed a modest degree of optimism, a reversal from April's negative sentiment, fueled by hopes of an easing in global trade tensions, though concerns over tariffs persist.

Key Decisions for Investors

• Investors should exercise caution regarding exposure to South Korean equities, particularly in export-oriented manufacturing sectors, given the sustained contractionary PMI, sharply falling new orders, and the negative impact of U.S. tariffs.
• Monitor upcoming economic data, particularly trade figures and domestic consumption indicators, for any signs of stabilization or further deterioration, which could influence the Bank of Korea's future monetary policy decisions.
• While there's a glimmer of optimism regarding trade tensions, the overall sentiment remains strongly negative, suggesting a defensive posture or hedging strategies might be appropriate until more concrete signs of recovery emerge.