Auto sector holding back Korea’s recovery

A slump in Korea’s automotive sector, which accounts for around 10% of GDP, is weighing heavily on the country’s prospects. The latest industrial production data which were published today show that motor vehicle output fell by 35% y/y in May, compared with a 20% drop in April. Export data for the first 20 days of June give little hope of a recovery in the near term. Passenger car exports were down 43% y/y in working-day adjusted terms, after a 36% fall in May. Supply-chain disruptions may have played a role in the recent weakness, but the main factor has been a collapse in demand. With economies across the world now gradually re-opening, demand should start to recover a little over the coming months. However, given the uncertain economic outlook we think consumers will remain wary of big-ticket purchases for some time to come. The poor prospects for the automotive sector will drag on the economic recovery. Overall, we think Korea’s economy will contract by 3% this year, which would be the worst performance since the Asian financial crisis.