South Korea: Economic activity contracted in April

All-industry industrial production (IP) in April was weak due to sharp declines in manufacturing and public administration activity. Manufacturing production in April fell 3.3% MoM (seasonally adjusted rate) versus consensus expectations for a fall of only 1.3%. This was the first drop in seven months. Food production has been weak since the beginning of the year as soaring input costs have squeezed food processing, while semiconductor production, particularly memory chips, declined for the second straight month - probably related to China’s lockdowns. Public administration fell 4.3% after rising over the past two months as Covid-19 subsided. Meanwhile, services and construction continued to improve, benefitting from local re-opening. Hotels & restaurants and personal services increased by 11.5% and 8.7%, respectively.

April retail sales declined 0.2% MoM, mainly driven by a sharp decline in pharmaceutical consumption (-12.5%) as the number of new Covid-19 cases decreased Other than the consumption of medicines, durable and semi-durable consumption rebounded. Outdoor activity has increased with social distancing easing, and automobile, apparel, and entertainment goods spending grew firmly. Looking ahead, the initial pent-up demand-driven consumption should slow down, but the government's consumption-boosting measures such as tax cuts and voucher programs will continue to support a steady consumption recovery in 2H.

Machinery and equipment investment deepened its contraction in April, dropping 9.0% MoM, the fourth contraction in a row, with electrical equipment (including semiconductor production equipment) down significantly. Machinery orders, a leading indicator for investment, also declined by 6.8% in April, with private orders down by 7.6%.

Today’s data indicate that weak production and investment will be the main obstacles to growth in 2Q22, but are partially offset by a solid recovery in services and consumption. We expect quarterly growth to bottom out in 2H. Globally, China’s lockdowns seem likely to be softened further, helping to normalize some of the disruptions to supply chains. On the domestic front, the largest supplementary budget (KRW62 tr) has been passed by the National Assembly. Cash disbursements to small business owners will begin in early June while consumption stimulus measures, such as consumption tax cuts and shopping voucher programs will support the recovery of consumption in the second half of the year. Large IT companies have also announced mid-term investment plans, which we expect to be implemented in earnest from the second half of this year on a significant scale. Consequently, we expect investment to be supportive in 2H22.