* April industrial output up for 2nd mth but misses expectations
* May exports to slow, partly on calendar effects
* South Korea first major economy to report May export data
* Domestic consumption partly eroded by ferry sinking (Adds new details, comments from govt official and new analyst)
By Christine Kim
SEOUL, May 30 (Reuters) - South Korea’s factory output grew at a much slower pace than expected in April although businesses continued to invest in plant and machinery, suggesting Asia’s fourth-largest economy can weather the recent loss of momentum thanks to improving exports.
Analysts and government officials blamed one-off factors for some of the weakness seen in data released on Friday, including last month’s ferry disaster which depressed domestic tourism and retail spending.
The industrial output index, which covers the manufacturing and mining sectors, rose a seasonally adjusted 0.1 percent in April from the previous month, following a revised 0.9 percent rise in March, Statistics Korea data showed.
It was much weaker than a median 0.6 percent gain tipped in a Reuters survey. Analysts in the same survey predict annual growth in exports during May to slow to 1.2 percent from 9.0 percent set in April.
Still, the economic picture isn’t all gloomy.
A Reuters calculation shows the average export value per working day would rise some 8 percent to $2.27 billion in May, up from $2.10 billion in the same month in 2013 despite the slowdown in overall shipments tipped by analysts.
“We believed that the one-off factors like the ferry sinking would be offset by robust exports in April, but things seem to be moving slower than anticipated,” said David Kim, an economist at Daishin Securities in Seoul. “However, we see an improving trend going forward as exports grow,” Kim said.
Analysts also note that part of the anticipated slowdown in May exports reflects fewer working days this year than last year.
Still, with domestic consumption continuing to remain weak, highlighted by the service sector output falling a seasonally adjusted 1.0 percent in April from March, exports will need to do much of the heavy lifting to support growth.
Friday’s data comes on the heels of news that the U.S. economy contracted for the first time in three years in the first quarter as it buckled under a severe winter. But there are signs it has rebounded and economists say it could grow as much as 4 percent in the current quarter.
A rebound in the U.S., South Korea’s second-biggest export market, will be crucial to cementing a recovery at home especially given a slowdown in China’s economy.
“Today’s figures don’t look strong but as a whole indicate the economy is softening instead of slipping into a sharp downturn,” Park Sang-hyun, chief economist at HI Investment and Securities.
The Bank of Korea expects the economy to grow an annual 4.0 percent this year, from 3.0 percent last year. The market’s consensus view also sees the BOK hiking rates as its next policy move, possibly as soon as the third quarter of this year.
A central bank survey found on Friday business sentiment among South Korean manufacturing companies was at its worst in 10 months, with their business outlook index for June falling to a seasonally adjusted 77 from 79 for May.
Government officials and analysts said last month’s sinking of a ferry, which killed more than 300 passengers and marked the worst civilian maritime disaster in two decades, darkened the public’s mood and contributed to a freeze in spending in leisure travel and hotel bookings.
Choi Sung-wook, head of the economic statistics bureau at Statistics Korea, told a briefing that the effects from the ferry sinking were expected to dissipate.
On the bright side, the statistics agency data showed capital investment during April was estimated to have risen by a seasonally adjusted 2.6 percent on the month, after a 1.2 percent gain in March. It was the first time since July last year that capital investment had gained for two consecutive months.
That partly reflects confidence about South Korea’s improving exports, with growing demand from the United States and Europe offsetting a slowdown in China, the largest market for South Korean shipments.
The labour market has also remained strong, while the housing sector has shown firm growth in recent quarters, supporting policymakers’ optimism for the economy’s prospects over the next year.
“Given South Korea’s strong reliance on exports, we have a positive outlook on the local economy,” Daishin Securities’ Kim said.
South Korea is the first major exporting economy in the world to report export data each month, providing early signs of the strength of the global economy.
Editing by Choonsik Yoo & Shri Navaratnam