By Jihoon Lee

SEOUL (Reuters) – South Korea's factory activity contracted sharply in September, marking the steepest decline in 15 months as overseas demand slowed, according to a private survey.

The Purchasing Managers Index (PMI) for manufacturers in Asia's fourth-largest economy, compiled by S&P Global, was at 48.3 in September (seasonally adjusted), down from 51.9 in August.

This is the first time in five months that the index fell below the 50-mark, which separates expansion from contraction, and indicates the lowest reading since June 2023.

Both output and new orders shrank in September, experiencing their steepest slumps in 11 and 15 months, respectively, after five straight months of gains. The survey highlighted sluggish domestic demand as a key factor behind the decline in orders, with new export business also recording its first drop of the year.

Export sales to China, Japan, India, and the United States weakened, according to the survey.

"South Korea's manufacturing sector experienced a reversal in fortunes during September. The forward-looking picture also appears clouded with uncertainty," noted Usamah Bhatti, economist at S&P Global Market Intelligence.

South Korea's economy unexpectedly shrank in Q2, marking the sharpest contraction since Q4 of 2022, and officials are looking to exports for growth recovery. The survey also showed backlogs of work—an indicator of near-term activity—fell significantly, while optimism for the year ahead plunged to the lowest level since December 2022.

Employment also decreased the most in 1.5 years, as Samsung Electronics announced plans to reduce its overseas workforce by up to 30% and SK On initiated voluntary redundancy programs.

On a positive note, inflation in input prices eased to its lowest since August 2023, and output prices declined for the first time in 13 months.