South Korea Manufacturers' Sentiment Is at 3-Year Low

By William Sim

July 31 (Bloomberg) -- South Korean manufacturers' confidence fell to the lowest level in more than three years as local and global sales slowed and raw-material costs spiraled.

An index measuring expectations for August dropped to 74 from 77 the previous month, according to a survey of 1,486 manufacturers released by the Bank of Korea in Seoul today. That's the weakest reading since February 2005. A score lower than 100 means pessimists outnumber optimists.

Faltering confidence adds to evidence that economic growth is cooling as record food and fuel costs erode household incomes and corporate profits. South Korea's $970 billion economy expanded at the weakest annual pace in more than a year last quarter because consumers reined in their spending.

``Rising commodity prices may have hit confidence among domestic-oriented firms,'' Kwon Young Sun, a Hong Kong-based economist at Lehman Brothers Holdings Inc., wrote in a report. ``Higher inflation weakens households' purchasing power, which is slowing retail spending.''

South Korea's benchmark Kospi index of shares rose 0.7 percent to 1,88.76 at 12:05 p.m. in Seoul. The index has dropped more than 16 percent this year. The won gained 0.2 percent to 1,011.75 per dollar.

Samsung Electronics Co., Asia's largest maker of flat screens, reported last week that losses at its consumer- electronics division more than doubled in the three months ended June 30 amid moderating global growth and rising costs.

`Slowdown Is Serious'

``The economic slowdown is serious and it's expected to continue throughout this year,'' Executive Vice President Chu Woo Sik, who heads investor relations at Samsung, told reporters on July 25. ``Uncertainty looms in the second half.''

The economy grew 4.8 percent in the second quarter from a year earlier, the weakest since the beginning of 2006. Spending by households, which are burdened with record debt, fell 0.1 percent last quarter, the first decline in four years.

An index measuring manufacturers' outlook for domestic sales declined to 96 from 100, while that for exports fell to 106 from 110, today's report showed. Exporters, so far, have been weathered the economic slowdown in the U.S. and Europe by selling more to China and emerging markets.

``It'll take some time for confidence to recover depending on how oil prices move in the future,'' said June Park, an economist at Woori Investment & Securities Co. in Seoul.

The price of crude oil has surged 75 percent over the past year, according to futures contracts traded in New York. South Korea is the world's fifth-biggest importer of the fuel.

An index of non-manufacturing companies' expectations for August remained unchanged at 75 on concern that sales and profits may slow. The Bank of Korea surveyed the manufacturers and 761 non-manufacturers between July 17 and July 24.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net.