Korea's industrial production predicted to climb a measly 0.6%

Thanks to a recovery in the auto sector.

According to DBS, industrial production (May), external trade and CPI data (June) will be released in the next few days. DBS forecasts a moderate rise in industrial output (0.6% MoM sa), which in large reflects a recovery in the automobile sector due to the easing oflabortensions and normalization of manufacturing production.

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The preliminary trade figures already reported that exports fell-3.0%YoYin the first 20 days of this month. A small export rise of 0.4% YoY is expected for the whole month of June.

CPI inflation is projected to remain low at 1.1% YoY. While the external outlook remains challenging, we think the outlook for domestic demand recovery is intact.

Consumption and construction investment are expected to provide more support to economic growth in the next two quarters, thanks to the twin easing of monetary and fiscal policies.

As the government announced temporary cuts in real estate acquisition tax and capital gains tax and the central bank also lowered interest rates, housing transactions have surged strongly by 22.3%YoYin April and 39.4%in May. Consumer confidence has also risen to 105 in June,the highest over 13 months.

Domestic demand recovery is unlikely to be derailed by the recent volatility in financial markets (triggered by fear of the Fed’s QE reduction). Despite the ongoing rise in long-term KRW bond yields, short-term money market rates – a better benchmark for bank lending rates – have remained stable.

The risks of yield spikes and broad liquidity tightening caused by massive capital outflows should be low, asthe country’ssovereign rating profile is strong and about 40% of the KTBsis held by foreign central banks for the objectives of reserve diversification.