Industrial Traders and Distributors

South Korea factory output slump adds to growth worries

Tourists wear masks as a precaution against the MERS virus at the Incheon International Airport in South Korea.
Chung Sung-Jun | Getty Images

South Korea's industrial output declined sharply in May, with production losses across key automobile, semiconductor and machinery sectors adding to signs that economic growth may have slowed in the second quarter.

Hit by a deadly respiratory virus and weak global demand, industrial output in Asia's fourth-largest economy fell a seasonally adjusted 1.3 percent in May from April, the third monthly decline and almost double the median 0.7 percent predicted in a Reuters survey of economists.

Tuesday's gloomy data follows a downwardly revised 1.3 percent fall in April output and analysts expect further weakness as domestic consumption was hit hard this month by the spread of Middle East Respiratory Syndrome.

"Exports may improve in June but domestic consumption was hurt by MERS; we can expect improvement in production from July when the effects of rate cuts start contributing," said Huh Jae-hwan, an economist at Daewoo Securities.

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The rapid loss of momentum prompted the central bank to cut interest rates for the second time this year, and the government is to deliver extra fiscal stimulus worth over $13 billion via a supplementary budget.

Read MoreMERS forces Korea central bank to cut rates to record low

Finance Minister Choi Kyung-hwan said last week he is concerned second quarter growth will be below 1 percent in sequential terms, and that low growth would continue long-term.

Underscoring weak demand, Statistics Korea data showed manufacturing companies were operating their plants at only an average of 73.4 percent of capacity in May, the lowest since the same 73.4 percent rate set in May 2009.

Production declines were seen in semiconductors, cars and machinery, highlighting the damage wrought by a collapse in exports. In May, South Korean shipments suffered their worst performance in nearly six years.

Tuesday's data also showed that service-sector output slipped by a seasonally adjusted 0.4 percent in May on a monthly basis, the biggest fall.