South Korean manufacturing gains momentum despite cost pressures

Business outlook is at its highest since May 2022.

South Korea's manufacturing sector gathered pace at the start of 2026, with new orders surging to their highest level in seven months and production returning to growth, though persistent inflationary pressures continue to weigh on the industry.

The Purchasing Managers' Index from S&P Global rose to 51.2 in January from 50.1 in December, marking the strongest improvement in manufacturing health since August and the first back-to-back readings above the growth threshold of 50.0 since mid-2024.

Demand for South Korean goods picked up strongly, with new orders rising for the second consecutive month and at the fastest rate since June 2024. Companies cited new products, stronger domestic demand and exports as key drivers. Export orders climbed at the quickest pace since April 2021, with growth reported from mainland China, North America and Europe.

The sustained improvement in new business prompted manufacturers to increase production for only the second time in 11 months. Output rose at a modest rate—matching September's performance—that was the joint-strongest since August. Companies linked higher production to orders from both domestic and export markets, alongside the impact of new product launches.

Rising workloads created capacity pressures, with backlogs of work accumulating for the first time in four months. However, employment fell marginally as firms controlled costs by not replacing staff who resigned or retired. The slight reduction in workforce numbers reversed a modest increase seen in December.

Manufacturers responded to higher output requirements by ramping up purchasing activity at the fastest rate since August, a robust pace above the long-term average. Despite this, stocks of raw materials fell for a third consecutive month as production consumed inventories. Finished goods inventories also shrank for a thirteenth straight month—the longest destocking streak since 2014.

Inflationary pressures remained stubbornly high. Input costs rose at a rate only slightly below December's 41-month peak, remaining well above the long-run average. Companies blamed the weak exchange rate and higher metals prices. Manufacturers passed on these cost increases, with selling prices rising at the second-fastest rate in nine months.

Supply chains showed little strain, with delivery times lengthening only slightly during the month.

Despite the headwinds, business confidence improved markedly. The outlook for the next 12 months reached its highest level since May 2022, with firms citing new product lines, diversification and favourable conditions in key sectors such as automobiles and semiconductors as reasons for optimism.

Trevor Balchin, economics director at S&P Global Market Intelligence, said South Korea's manufacturing sector made a good start to 2026. "Inflationary pressures remain a concern, however, with input price inflation holding close to December's 41-month high," he noted. "A slight cut in employment reflected efforts to control costs through the non-replacement of leavers, and backlogs of work accumulated as a result."

The survey polled around 400 purchasing managers across South Korea's manufacturing sector.