* July exports +5.7 pct y/y (Reuters poll: +4.7 pct)
* July annual inflation at 1.6 pct (Reuters poll: 1.6 pct)
* July HSBC/Markit mfg, export orders PMIs both miss 50 (Recasts lead, adds context on rates, market reaction and comments)
By Christine Kim and Choonsik Yoo
SEOUL, Aug 1 (Reuters) - South Korean exports in July grew at their fastest annual clip in seven months, but relatively subdued inflation and weakness in shipments to China kept alive the prospect of an interest rate cut at this month’s central bank policy review.
A combination of still-tepid global demand and weak domestic consumption have seen Asia’s fourth-biggest economy lose momentum in recent months, and Friday’s batch of data backed market expectations for the Bank of Korea to add to the government’s $11-billion stimulus package announced last week.
“The possibility of a rate cut still stands as this week’s data including the output data showed overall performance of the economy was far from improving very fast,” Park Sang-hyun, chief economist, HI Investment & Securities.
Many analysts now expect the Bank of Korea to trim the policy interest rate by 25 basis points to 2.25 percent, perhaps as early as at its Aug. 14 meeting. It last cut the rate by the same margin in May last year.
A rate cut may also help the economy to move past the ripple effects from April’s ferry accident, which depressed consumer and business sentiment.
Crucially, South Korea’s manufacturers are not selling nearly enough to their biggest export market China, which took some of the shine off total July shipments growth of 5.7 percent from a year earlier to $48.42 billion - the biggest rise since December.
Exports to China, which takes about one-quarter of Korea’s shipments, fell a sharp 7.0 percent in July from a year before, trade ministry data showed.
Kwon Pyung-oh, head of the ministry’s trade and investment bureau, told reporters the government is “very concerned” about the drop in exports to the world’s second-biggest economy.
Sales to the United States, however, jumped 19.4 percent, while those to the European Union rebounded from the prior month’s fall, rising 11.5 percent.
Taken together, analysts still see sluggish exports growth over the rest of the year, as a slowdown in China and a largely uneven global recovery drag on the export-reliant economy.
“We still forecast single-digit growth (in South Korean exports) on average for 2015,” said Ronald Man, economist at HSBC in Hong Kong, noting the slow recovery in exports. He added double-digit growth would only be possible in late 2015.
South Korean financial markets showed muted reaction to the batch of indicators as international events such as troubles in Argentine and a slump on Wall Street overnight checked sentiment, although a survey showing strength in China manufacturing helped calm nerves.
South Korea’s economy relies heavily on exports for growth as performance by key exporting industries such as smartphone, automobile and oil refining sectors has a strong influence on jobs and investment.
With the economy slowing to its weakest in more than a year in the second quarter, the government last week announced stimulus measures including $11 billion in public spending and easing of mortgage borrowing restrictions.
The government had predicted exports would begin picking up from early this year, though global demand has remained uneven.
The challenging overseas conditions were highlighted again in a private-sector survey by Markit Economics and HSBC released separately on Friday. It indicated that new export orders received by South Korean manufacturing companies during July fell for a fourth consecutive month.
“We reiterate our baseline forecast that 2014 will be another year of virtually flat export and import growths and a wide trade and current account surpluses,” ING said in a note to clients, underscoring the cloudy outlook for South Korea’s manufacturers.
The trade ministry data showed imports rose 5.8 percent to $45.90 billion, resulting in a trade surplus of $2.52 billion last month,
Inflation in July eased to an annual 1.6 percent from 1.7 percent in June, matching market expectations, as farm products prices fell on year and prices of consumer goods remained under pressure, statistics agency data showed.
A combination of weak domestic demand, benign global energy prices and a firming won have held South Korea’s annual inflation below the lower end of the central bank’s 2.5 percent-3.5 percent target band since June 2012. This gives the BOK enough headroom to ease monetary policy without worrying about letting inflation getting out of hand.
Housing price data from the country’s top mortgage bank showed on Friday South Koreans were positively reacting to the government’s property market measures as prices rose for an 11th consecutive month in July.
Editing by Shri Navaratnam