Production growth in Korea’s manufacturing sector slowed to near zero, its worst since more than three years ago when the nation was hit hardest by the global financial crisis.

Output growth of small and medium-sized companies turned negative for the first time since then.

The worldwide economic slowdown, led by the fiscal crisis in the eurozone, discouraged production at Korean SMEs pushing down their plant operation rate to its lowest level in three years.

The entire manufacturing sector’s output grew only 0.4 percent in the three months to September, according to financial industry sources and the Korea Small Business Institute. It is the lowest figure since -5.8 percent in the second quarter of 2009.

The quarterly output growth of manufacturers, which led the country’s export-driven economy for decades, peaked at 26.8 percent after the global financial crisis, and never went below 5 percent last year, but continued downhill this year.

The downturn is mainly attributed to the prolonged crisis in Europe that shook China and the U.S., dealing a blow to Korean exporters and parts makers that sell their products to the world’s two largest economies. Sluggish domestic demand, hampered by still-rising household debt, is also weighing on the manufacturing sector.

Small and medium-sized manufacturers are more or less in depression. Their third-quarter output dropped 1.8 percent from a year ago, posting negative growth for two quarters in a row, with -1.7 percent in the second quarter.

The last time manufacturing SMEs posted negative output growth was in the third quarter of 2009 (-2.1 percent). Their on-year quarterly production growth quickly recovered to around 18 percent in 2010, slowed last year, and finally fell below zero.

SMEs’ plant operation rate hit 70.8 percent in the July-September period, the lowest since 69.9 percent three years ago, on slackening exports and subdued domestic demand.

“The decline in manufacturing SMEs’ output growth and plant operation rate indicates a major contraction in their production, which is unlikely to recover soon since the economy is unlikely to pick up significantly next year,” said Chang Yoon-seop, a researcher at KOSBI.

Large manufacturers are slightly better off than SMEs, which are relatively more vulnerable to external shocks, but their output growth is sagging, too.

Manufacturing giants’ production growth peaked at 30.1 percent in the first quarter of 2010 and has tumbled since then, down to 1.2 percent in the three months to September this year.

As SMEs increasingly suffer from financial woes, some industry observers voice the need for financing policies to support SMEs in high value-added manufacturing industries.

“The global financial crisis made even advanced economies to emphasize the importance of manufacturing. Korea must foster high-value-added manufacturing industries,” said Chae Seung-byung, a senior analyst at Samsung Economic Research Institute.

By Kim So-hyun (sophie@heraldcorp.com)