South Korea factory growth moderates but stays strong

Material shortages blunt its AI-driven order boom despite record export run.

South Korea's manufacturing sector kept up its growth trajectory in August, though momentum moderated from the pace set at the start of the third quarter, the latest S&P Global survey showed.

The seasonally adjusted South Korea Manufacturing Purchasing Managers' Index (PMI) slipped to 52.3 in August from 53.1 in July, still signalling a modest improvement in the health of the manufacturing economy and a rate of growth above the long-run series average, among the fastest recorded in over four years.

Output rose for an eighth consecutive month, underpinned by export demand that grew at its strongest pace in nearly six years. Manufacturers reported increased orders from major trading partners across Asia, Europe and North America, with export sales climbing at their fastest rate since November 2020. Overall new orders extended their run of growth to nine months, though production growth eased slightly as capacity constraints continued to bite.

Employment rose for the fifth time in six months, but capacity pressures intensified as material shortages hampered firms' ability to complete orders. Backlogs of work built up at a solid, accelerated pace, while finished goods inventories fell at their sharpest rate since May as products were often shipped out immediately after assembly. Supply chain disruption, though easing, persisted, with respondents citing further transport issues stemming from the Middle East conflict and vendor shortages.

Inflationary pressures continued to ease. Input cost inflation slowed for a fourth consecutive month to its weakest pace since November 2025, helped by more favourable exchange rates and stabilising raw material costs. Output price inflation also decelerated, to a seven-month low, as some manufacturers held back from passing on higher costs to customers.

Looking ahead, South Korean manufacturers were at their most confident in three months, with nearly 27% of respondents expecting higher output over the coming year, citing bullish sales forecasts, mass production plans and opportunities from new technology products and services.

David Owen, principal economist at S&P Global Market Intelligence, said the easing in overall new order growth was offset by a robust rise in export demand — the strongest since November 2020 — showing firms were still benefiting from the current AI and semiconductor "supercycle". He added that with backlogs rising solidly and finished goods inventories depleting further, material shortages were clearly limiting firms' ability to capitalise on the demand boom, though a slight lengthening in delivery times offered some hope the constraints were beginning to unravel. Owen said the continued easing in input cost inflation also pointed to better prospects for margins, though much depended on the trajectory of the Middle East conflict and any further impact on global supply chains.