South Korea’s industrial activity remained sluggish in June as external uncertainties – notably the prolonged US-China trade dispute – persisted.

Korea’s GDP increased 1.1% in the second quarter, a sharp reversal from minus 0.4% growth in the first quarter, but government spending contributed 1.3% growth while the private sector contribution to GDP was minus 0.2%. This reality was reflected in industrial activity in June.

The National Statistical Office (NSO) said on Wednesday that industrial output fell 0.7% on-month following a 0.3% decline in May.

Mining and manufacturing production rose a marginal 0.2% on-month, while automobile production fell 3.3%. But the production of semiconductors increased by 4.6% and production of electronic components such as OLED TVs also increased by 3.2%.

The average facility utilization rate stood at nearly 72%, the same level as in May. Manufacturing inventories fell 0.9% from the previous month, led by electronics parts, semiconductors and oil refining, while shipments rose 1.4%.

“It’s positive that the inventory decreased,” Kim Bo-kyung, an official at the NSO, said. “However, basically, manufacturers were overstocked. It is too early to expect the production to surge,” he said.

Output in the service sector fell 1.0% on-month, marking the first decline in three months. The information and communications sector fell 4.2%, and financial insurance also fell 1.8%. Wholesale and retail output data also declined 0.3%.

Retail sales down

Retail sales fell 1.6% on-month. Passenger car sales were also down 3.9%, while non-durable goods such as food and beverage products fell 0.3%.

“The fall of retail sales was primarily due to a drop in durable goods,” said Kim of the NSO. “Sales of passenger cars declined as some imported cars, and popular Korean-made cars were in short supply. There is a waiting demand for cars, but sales are sluggish due to supply disruptions.”

Facility investment rose 0.4%, rebounding from a 7.1% fall in May but construction investment fell 0.4%. Construction edged up, but the civil engineering sector fell 3.6%, leading to a drop in construction investment.

The coincidence index, which shows current economic conditions, fell 0.1% on-month. It returned to negative territory a month after rising for the first time in 14 months in May.

The leading index, which shows future economic trends, also fell 0.2% on-month. The coincidence index and leading index declined together for the first time in three months.

Concern over Japan

The Ministry of Finance explained in a press release that “worsening external conditions due to the US-China trade war and slowing global economic growth affected industrial production data.”

Currently, there is no force driving economic growth other than government spending, but some worry that Japan’s export regulations will further dampen the economy.

“As both exports and domestic demand remain sluggish, production, which is the basis of growth, is continuing to slow down,” said Lee Sang-jae, an economist at Eugene Investment & Securities Co. “If Japan’s export regulations are in full swing, it is likely that the economy will suffer from a tougher slump in the second half of the year.”

The ministry said it would speed up measures to boost the economy such as the swift implementation of the supplementary budget and the promotion of investment, exports and consumption.