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Korea Output Unexpectedly Falls as Europe Caps Demand

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July 31 (Bloomberg) -- South Korea’s industrial production fell for the first time in three months in June as Europe’s debt crisis and China’s slowing economy curtailed export demand.

Output fell 0.4 percent last month from May when it climbed a revised 1.3 percent, Statistics Korea said today. The median estimate of 12 economists in a Bloomberg News survey was for a 0.1 percent gain. Production rose 1.6 percent from a year earlier.

South Korean manufacturers’ confidence dropped to a three-year low for August, the central bank said yesterday, after Asia’s fourth-largest economy grew at the slowest pace in almost three years last quarter. Bank of Korea Governor Kim Choong Soo warned last week the economy is losing steam, fueling speculation policy makers will follow a surprise rate cut on July 12 with further easing.

“The lower-than-expected output figure once again shows that the European crisis is hurting South Korean companies and consumer sentiment more than what economists had thought,” said Lee Sung Kwon, an economist at Shinhan Investment Corp. “Although the industrial output data may not be enough for the Bank of Korea to cut rates again this month, they may have to in September or October.”

The won gained 0.1 percent to 1,137.60 per dollar at the close in Seoul yesterday, according to data compiled by Bloomberg. It touched 1,132.45 earlier, the strongest since May 4, on speculation Europe’s policy makers will act to resolve the region’s debt crisis. The benchmark Kospi Index rose 0.8 percent.

‘Difficult’ Situation

South Korea’s economy is in a “difficult” situation, Finance Minister Bahk Jae Wan said yesterday, adding that he will do “everything I can to find a solution for the sluggish domestic economy.” Bahk ruled out additional fiscal stimulus in a July 16 interview, saying it would do more harm than good while the global economy is weak.

The South Korean index for manufacturers’ confidence in August was at 70 after 81 for July, the central bank said yesterday. South Korea’s consumer confidence fell to a five-month low in July, the BOK said on July 25.

Economic confidence in the euro area fell more than economists forecast to the lowest in almost three years in July, the European Commission in Brussels said yesterday. European governments are trying to contain the debt turmoil, which last month forced Spain and Cyprus to seek external aid.

“The Bank of Korea might continue to cut rates as Europe’s debt crisis persists,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “The Korean economy is likely to remain sluggish as domestic consumption weakens and exports fall.”

To contact the reporter on this story: Cynthia Kim in Seoul at ckim170@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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