Manufacturing shrinks 13.5% in Q1

Despite a recent thawing mood in markets, the country`s manufacturing sector is still in the grips of a big chill from a global economic slowdown, central bank data showed yesterday.

Growth in the manufacturing industry came in at a shocking minus-13.5 percent in the first three months of this year, dropping further from the previous quarter`s minus 9.1 percent.

It was the worst quarterly performance since such statistics began being recorded in 1970, the Bank of Korea said. Manufacturing growth had fallen to minus-11.7 percent in the second quarter of 1998, when the Asian financial crisis nearly bankrupted Korea.

"With a sharp decline in demand both at home and abroad, companies have seen inventory piling up since July last year. Companies are now getting rid of the inventory, rather than newly producing," said Hwang In-seong, chief researcher at Samsung Economic Research Institute, a Seoul-based think thank.

The sharp contraction in the manufacturing sector is particularly worrisome, experts say, because it has a big impact on other industries and the job market.

The Korean economy`s 4.3 percent shrink in the first quarter of 2009 was driven by a steep decline in manufacturing output.

The manufacturing sector reported the steepest drop in new employment in March from a year ago. The sector was employing slightly more than 4 million workers in April last year, but it was reduced to 3.81 million last month.

"The contraction in the manufacturing sector leads to tightening of the job market, which then affects consumer spending," Yoo Byung-gyu of Hyundai Research Institute said. "Manufacturing output will recover slowly only after companies complete unwinding their inventories," he said.

According to the Input-Output Table of the Korean economy that the BOK released last week, manufacturing contributes to 46.5 percent of the nation`s total output, followed by the services industry at 40.4 percent and construction at 9.3 percent.

It has the most far-reaching impact on other industries, such as services, energy and mining. Its index of the power of dispersion, a measurement showing the impact that a unit output in an industry has on other industries or the level of backward linkage, stands at 1.068, higher than services` 0.887 and mining`s 0.760. The index of the sensitivity of dispersion, a gauge of the forward linkage level, is also higher than other sectors at 1.035.

"The manufacturing sector is the only one that shows a higher level of backward and forward linkage, which means that its impact on the national economy is significant," a BOK official explained.

By Lee Sun-young



(milaya@heraldm.com)