Here's why Korea is poised for cyclical growth recovery

Its 1.4% inflation rate to add stimulus into the economy, says analyst.

Inflation rate According to DBS, although the latest economic data posted mixed results, it maintains the view that a cyclical growth recovery remains on track for Korea.

Here's more:

Manufacturing PMI rose above the neutral level to register 50.9 in February (50.4 on average in JanFeb, up from 48.6 in 4Q12).

This was chiefly driven by the rise in new orders including new export orders, which was in line with the recent improvement seen in customs export data – export growth picked up to 1.1% YoY in Jan-Feb from -0.4% in 4Q12. 

Industrial production, however,reported a disappointing decline of-1.5% MoM sa in January.

This should be explained by the facts of still-high inventory levelsin the manufacturing sector, as well asthe supplyside constraintsstemming from cold weather.

As the final demand outlook continuesto improve and weather conditions will normalize soon in the spring season,the ongoing production weakness should be temporary and output growth islikely to pick up notably in 2Q.

Inflation has stayed low and stable (1.4% YoY in Feb), providing scope for the central bank to cut rates further and add stimulus into the economy.

That said, whether the BOK will actually take rate actions remains doubtful. When the BOK cut ratesin July and Octoberlast year, they also downgraded the annualgrowth forecasts.

Currently,the downside risks facing the BOK’s growth forecast of 2.8% for 2013 are very low, even if taking into accountthe recent data weakness. Meanwhile, inflation numbers have already passed the bottom. 

The favorable base effects resulting from last year’s governmentsubsidy program will dissipate soon starting from March.

In addition, the need of lowering interest rates to weaken the currency has also been reduced, as the Korean won has returned gains versus the greenback since mid-January and the KRW/JPY crossrate has also stabilized.

All in, we maintain the forecast for the BOK to hold rates steady at March’s policy meeting scheduled next Thursday.