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South Korea Production Gains Slow as Europe Damps Exports

South Korea’s industrial production rose at a slower pace last month as the European debt crisis damped exports and domestic demand weakened.

Output gained 0.3 percent from a year earlier after rising a revised 14.3 percent in February, Statistics Korea said today. The median estimate of 12 economists in a Bloomberg News survey was for a 2.2 percent increase. Production fell 3.1 percent from February when it gained a revised 0.6 percent.

South Korea’s economy expanded the most in a year last quarter, driven by government spending and investment by semiconductor chipmakers. Even so, the central bank lowered its full-year growth forecast on April 16 and Finance Minister Bahk Jae Wan warned last week of downside risks to growth from Europe’s debt crisis and elevated oil prices.

“Today’s data raises a question about the strength of the recovery momentum, with exports falling and domestic demand staying weak,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “The second half will be much better but it largely hinges on China and other big economies.”

Some semiconductor chip producers and other technology companies cut inventories last month, probably ahead of the release of new products, which may bode well for production in coming months, Choi Sang Mok, director-general at the finance ministry, told reporters in Gwacheon today.

Path to Recovery

“The economy is on a recovery path but external uncertainties persist so it’s premature to see a full-speed recovery yet,” Choi said.

South Korea should increase interest rates once economic uncertainty clears and allow its currency to appreciate to counter inflationary pressures, the Organization for Economic Cooperation and Development said last week.

The won rose 0.2 percent to 1,132.55 per dollar in Seoul as of 10:05 a.m., according to data compiled by Bloomberg. The Kospi Index gained 0.4 percent.

South Korea’s index of leading economic indicators rose 0.4 percent in March from February, compared with a 1 percent gain in February, today’s report showed. Sales of consumer goods dropped 2.7 percent from February and were unchanged from a year earlier.

Trade Report

Overseas shipments probably fell 1.1 percent in April from a year ago, according to the median estimate of 13 economists in a Bloomberg News survey ahead of a separate government release tomorrow.

South Korea’s gross domestic product rose 0.9 percent in the first quarter from the previous three months, the fastest pace in a year, according to a central bank report last week. The Bank of Korea reduced its forecast for this year to 3.5 percent from 3.7 percent on April 16.

“Household consumption remains weak and needs to pick up for growth to be sustained, especially as public spending eases in the second half of the year,” Ronald Man, a Hong Kong-based analyst at HSBC Holdings Plc, said in a report before today’s release.

Man forecasts that the Bank of Korea will hold its benchmark rate at 3.25 percent to support growth, with an increase coming only in the fourth quarter. Borrowing costs haven’t changed since June 2011, when policy makers raised them by a quarter percentage point.

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