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UPDATE 2-Strong S.Korea output, current account data flag bright outlook

Christine Kim and Se Young Lee
Tuesday, 28 Jan 2014 | 10:16 PM ET

* S.Korea Dec industrial output beats expectations

* S.Korea 2014 c/a surplus at record $70.73 bln -c.bank

* Firm fundamentals seen as support for S.Korea against shocks

(Recasts lead, adds background and quotes from analysts, policymakers)

SEOUL, Jan 29 (Reuters) - South Korea's industrial output surged in December and its current account surplus grew to a record last year, suggesting Asia's fourth-largest economy carried strong momentum into 2014 with sufficient buffers to weather the latest global markets turmoil.

The step up in industrial activity also reinforces an improving outlook for overseas shipments for the export-reliant economy, home to some of the world's biggest manufacturers of cars, ships and smartphones.

"The (industrial output) numbers have exceeded our estimates, which indicates the economic stimulation from the previous second and third quarters were effective, as well as reaffirming the strong fundamentals of South Korea compared to other emerging markets," said IBK Securities economist Na Jung-hyeok.

Overseas shipments, which are expected to grow 6.4 percent this year from a modest 2.1 percent rise in 2013, heavily influence the country's current account balance and industrial output.

On Wednesday, Statistics Korea said that industrial output grew by a seasonally adjusted 3.4 percent in December from the previous month, the biggest gain since June 2009, and topped the most optimistic forecast of 2.5 percent in a Reuters survey of economists.

Separately, data released by the Bank of Korea showed the country ran a record current account surplus of $70.73 billion last year.

South Korea's strong external balance, spurred by growing demand for its exports in its biggest markets of China and the United States, places the economy in good shape to weather the kind of turmoil seen in emerging markets in the past week.

The country has also continued to reduce its short-term external debt and built up its foreign currency reserves in a bid to bolster its defences against external shocks.

In a move that helped shore up riskier currencies and calm emerging markets, Turkey's central bank more than doubled some of its key rates. The forceful defence of the lira, which had plunged in recent sessions, also pushed the won up more than 1 percent against the dollar in early trade Wednesday.

With growth picking up speed, many economists expect a brighter outlook for South Korea over the year.

"This (data) suggests the economy remains on track to post stronger growth in 2014," said Ronald Man, economist at HSBC.

REASONS FOR CAUTION

The Bank of Korea expects gross domestic product growth to pick up to 3.8 percent in 2014, led by rising exports, from 2.8 percent in 2013.

Still, some analysts say there are plenty of reasons to remain cautious, highlighting risks to the global economy as the U.S. Federal Reserve continues to cut back its stimulus and tighter credit conditions in China threatening to slow its growth.

Domestic consumption has also failed to show any notable growth, as most Koreans save up to pay off their debt rather than spend on cars and homes.

Analysts and policymakers also remain concerned about the Japanese yen's future trajectory, with Tokyo expected to remain committed to its massive easing campaign to reinflate the economy.

Further depreciation of the yen would undercut local exporters' price competitiveness against Japanese rivals, with major local manufacturers like Samsung Electronics Co. and Hyundai Motor Co. already pointing to the won's relative strength as a factor in their weak fourth-quarter earnings.

"Variables like the uncertain direction of currency rates and downward adjustments of corporate earnings are reasons not to be too sanguine about this year's growth outlook," said IBK Securities' Na.

The median forecast from a Reuters survey of economists tips the country's overseas shipments to fall by an annual 0.2 percent this month, though that would be distorted by the fewer working days due to the Lunar New Year holidays.

The Reuters survey also tipped January's annual consumer inflation at 1.1 percent, holding steady from December. With domestic demand running soft and cautious local companies holding back from spending, inflation has held well below the central bank's target band of 2.5 percent to 3.5 percent.

The Bank of Korea is widely expected to start raising interest rates later this year from the current 2.50 percent , assuming that growth continues to recover and price pressures begin to build.

"In the absence of a threat like a significant slowdown in China, exports should recover in line with the recovery in advanced markets and boost domestic demand," said Hyundai Securities economist Lee Sang-jae, adding that the central bank's 2014 growth projection is well within reach.

(Additional reporting by Jungmin Jang; Editing by Shri Navaratnam)