South Korean manufacturing returns to growth as export orders recover

New orders surged to a 13-month high despite sharp acceleration in cost pressures.

South Korea's manufacturing sector returned to growth in December for the first time in three months, driven by the strongest rise in new orders since November 2024 and a notable recovery in export demand.

The S&P Global South Korea Manufacturing Purchasing Managers' Index (PMI) registered 50.1 in December, up from 49.4 in November, indicating a renewed, albeit fractional, improvement in the health of the sector. This expansion was the first since September. A reading above 50 signals expansion, whilst below indicates contraction.

The recovery came as business confidence surged to its highest level in just over three and a half years, encouraging manufacturers to increase both employment and purchasing activity despite a sharp intensification in cost pressures.

There was a renewed and modest increase in incoming business, with new orders rising for the first time in three months and at the strongest rate since November 2024. Firms frequently cited new product launches and stronger international demand as key factors behind the rise.

New export orders also returned to expansion territory for the first time since September, as manufacturers signalled improving demand in key markets across Europe, the Americas and mainland China. This marked a significant turnaround for South Korea's export-dependent manufacturing sector.

Despite the evolution in demand conditions, manufacturers recorded a sustained yet softer contraction in production levels in December, extending the current sequence to three months. The ongoing output decline suggests firms are still working through adjustments, though the rate of contraction eased from November.

The improved picture for demand helped to strengthen the year-ahead outlook for production in December, as firms expressed hopes that business expansions and the launch of new products would boost output and sales. The overall degree of positive sentiment was the most pronounced since May 2022.

Confidence in the outlook and increased capacity requirements also encouraged manufacturers to raise employment levels for the first time in three months. Concurrently, December data pointed to an increase in purchasing activity for the first time since September, partly in response to higher new orders but also as part of efforts to protect against rising raw material prices. The rise in input buying was also the most marked since August 2024.

Backlogs of work broadly stabilised in December as some firms indicated that higher new orders had started to impart some pressure on capacity. Inventories of both pre- and post-production goods were reduced as firms drew on existing reserves to keep pace with output and demand requirements.

Suppliers' delivery times saw a sustained, albeit fractional, lengthening during December, though the rate of deterioration was the softest in the current nine-month sequence.

On the price front, inflationary pressures intensified at the end of 2025. The rate of input cost inflation was marked and reached the highest level since July 2022 amid higher raw material prices and unfavourable exchange rate fluctuations.

In turn, output prices were raised solidly, and at the strongest pace since March, following a brief reduction in charges during November. Manufacturers sought to protect profit margins by passing increased costs on to customers.

Usamah Bhatti, Economist at S&P Global Market Intelligence, said: "December presented an improved picture for the South Korean manufacturing sector as 2025 drew to a close. New orders returned to expansion territory for the first time in three months, with the pace of growth reaching its fastest in just over a year. Exports were a notable point of strength, also rising for the first time in three months.

"According to manufacturers, new product launches and improved external demand drove the improvement in sales, whilst confidence in the outlook also improved markedly in December to reach its highest level since May 2022. In turn, firms were encouraged to raise both employment levels and purchasing activity.

"The inflation picture was less positive, however, with the rate of input cost inflation accelerating markedly in December amid higher raw material prices and exchange rate weakness. In response, firms more than reversed the slight cut in charges seen a month prior, raising factory gate prices to the greatest extent in nine months in an effort to protect profit margins."

The data suggest South Korea's manufacturing sector enters 2026 on stronger footing, with reviving export demand and surging business confidence providing grounds for optimism. However, the sharp acceleration in cost pressures and ongoing production weakness indicate challenges remain as manufacturers navigate the early months of the new year.