South Korea’s manufacturing sector suffers sharpest decline in over two years

New orders plummet to lowest level since COVID-19 pandemic

South Korea's manufacturing sector endured its worst performance in over two years during May, with new orders falling at the sharpest rate since the initial wave of the COVID-19 pandemic in June 2020, according to the latest S&P Global Manufacturing Purchasing Managers' Index (PMI).

The seasonally adjusted PMI rose slightly to 47.7 in May from April's 47.5 but remained well below the 50 threshold that separates expansion from contraction.

This marked the fourth consecutive month of deteriorating business conditions, with the solid worsening representing the second-largest decline in just over two years.

The manufacturing downturn was driven by increasingly sharp contractions in both output and new orders, the two main components of the headline PMI. Output fell at its quickest rate in 31 months, whilst new orders declined at the most pronounced pace in nearly a decade, when excluding the pandemic period.

S&P Global Market Intelligence cited a stagnant domestic economy and the impact of rising US tariffs as key factors weighing heavily on demand and output. International demand also remained subdued, falling for the second consecutive month, with respondents particularly highlighting the United States as a source of declining new export orders.

"South Korea's manufacturing sector came into May on unstable footing," said Usamah Bhatti, economist at S&P Global Market Intelligence. "Firms often mentioned that the contraction was attributed to a continuing stagnation in the domestic economy, as well the continued impact of higher US tariffs on the home market as well as on key export markets."

The weakness in demand led to a sharp depletion of backlogs of work for the second successive month, with the rate of decline being the most pronounced in nearly five years as firms focused on completing existing orders amid muted new business.

Despite the challenging operating conditions, South Korean manufacturers raised employment levels for the first time since October 2024. The rate of job creation was the strongest since September 2023, as firms took on new full-time staff whilst expressing cautious optimism about the year ahead.

Business confidence improved after a brief spell of negative sentiment in April, with companies expressing hopes that global trade would stabilise and the domestic economy would recover. However, the degree of confidence remained modest amid ongoing concerns over the impact of tariffs.

On the cost front, manufacturers faced softer input price inflation in May, with the rate easing to its gentlest level since October 2024. Some companies reported lower oil and metal prices, though raw material costs continued to rise elsewhere, exacerbated by unfavourable currency movements.

Goods producers raised their charges at the slowest rate in the current six-month sequence of inflation, reflecting the broader challenges facing the sector.

The manufacturing struggles highlight the broader economic headwinds facing South Korea as it navigates evolving global trade policies and domestic economic stagnation. With the sector representing a crucial pillar of the country's economy, the performance will be closely watched by policymakers and investors alike in the coming months.