South Korean factory output posted its sharpest drop in seven years in February, data showed on Tuesday, sparking concerns a recovery in the economy may not be as strong as touted by the government. A big rebound in wholesale and retail sales last month, released at the same time as the output figures, provided more backing for government optimism local demand was recovering from a two-year slump, but was given short shrift by investors.
Government bond prices soared and stocks fell, while the country's top business lobby group forecast a fall-off in key exports of semiconductors and autos in the second quarter.
Factory output fell a faster-than-expected 4.6 percent in February from January, the National Statistical Office said.
The seasonally adjusted output reading marked its biggest drop in seven years and was far weaker than a median forecast in a Reuters poll for a 0.6 percent fall.
Economists said the output data must have been distorted by the Lunar New Year holidays, which fell in February this year as opposed to January in 2004, but added that any rebound in March and beyond would only be moderate.
"The data was not so weak as to change our view that the economy has passed its worst point and we still expect a rebound in March, but the recovery will only be mild," said Lim Ji-won, an economist with J.P. Morgan Chase Bank.
The three-year treasury bond yield ended down 17 basis points at 3.92 percent, its lowest closing level in two months, while the stock market slid 1.9 percent. The won was down 0.2 percent versus the dollar.
In an apparent move to soothe investors, the finance ministry said more recent data showed the economy, Asia's third largest, was continuing to improve despite the poor February output data.
"When taking into account various indicators, indicators related to economic recovery will not deviate much from the trend that we have seen," the ministry said in a statement.
Exports for March would be up about 13 percent from a year earlier, credit card usage for the first 27 days of the month rose 14.6 percent over a year ago, and department store sales for the first 20 days of March were up 6.4 percent, it said.
South Korea's seasonally adjusted industrial production showed steady growth in September, October and November last year, but has been erratic since then, according to data from the statistics agency.
The Federation of Korean Industries (FKI), the country's top lobby group for big companies, said exports in the second quarter were likely to slow, with semiconductors hit by global oversupply and autos by a firmer won currency.
Semiconductor exports were forecast to drop 7.1 percent in the year through the second quarter, after an estimated 8.6 percent gain for the first, while auto exports would grow only 4.2 percent, down from a 15.5 percent gain, the FKI said in a statement. The two items account for one-fifth of South Korea's total exports. A 31 percent rise in overall exports in 2004 enabled the country's economy to expand by 4.6 percent, despite a 0.5 percent drop in private consumption, according to government data.
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