(Updates with analyst comments, details)
By Kim Myong-hwan
SEOUL, Aug 28 (Reuters) - South Korean industrial output recorded its sharpest monthly fall in seven years in July, the government said on Thursday, attributing the drop mainly to the labour unrest at the country's largest car maker.
Although the strike at Hyundai Motor Co Ltd can be regarded as a one-off case, analysts said the data still cast doubt on recent government assertions the economy had bottomed.
"The July data is far worse than we expected to see, dashing hopes of a third-quarter recovery, however mild," said Oh Moon-suk, a senior economist at LG Economic Research Institute.
Industrial production dropped a provisional 3.9 percent in July from June, the worst performance since June, 1996, when it fell at the same rate, the National Statistical Office (NSO) said.
June industrial production was 2.8 percent higher than May's.
The monthly reading, adjusted for seasonal factors, was well below an average forecast for a 1.1 percent fall in a Reuters survey of 10 economists conducted on Tuesday.
The weak data had little impact on the stock market , but pushed up government bond prices, with the benchmark three-year yield off six basis points at 4.51 percent.
Analysts said strong exports, led by information-technology items, limited the damage from the labour problems at Hyundai Motor.
Exports rose 15.5 percent to $15.5 billion in July from a year earlier, the commerce ministry said this month, led by wireless telecommunications devices, which were up 53.5 percent, and computers, which rose 20.2 percent.
HOLIDAYS, MORE STRIKES TO HIT OUTPUT
But faltering domestic consumption and investment had dimmed the prospects of an early economic recovery, analysts said.
The NSO said wholesale and retail sales were down 1.8 percent in July from a year earlier, while capital investment had sagged 11.0 percent.
"Besides, a strike by truck drivers and heavy rains hampered production in August and a lot of public holidays, including the three-day Chusok full moon festival, will reduce September production," said Lee Soo-hee, an economist at Korea Economic Research Institute.
Earlier this month, Hyundai Motor resolved a strike that cost the company $1.2 billion in lost production. It caved in to union demands for an 8.6 percent rise in basic pay, more say in managerial decisions and a shorter work week.
However, soon after the Hyundai strike ended about 30,000 truck drivers walked out, causing freight blockages and costing the country $472 million in delayed shipments as of Wednesday.
"Without the Hyundai impact, July industrial output could have grown, albeit slowly," said Shin Seung-woo, a director at the NSO's industrial statistics division.
Before taking into account seasonal factors, output was 0.7 percent higher in July than a year earlier, versus the 8.4 percent rise in the 12 months to June and a 10.6 percent rise in the year to July, 2002, the NSO said.
South Korea's central bank confirmed last week the economy had entered its first recession in five years in the first half of 2003, hit by a slide in domestic consumption and investment.
Finance Minister Kim Jin-pyo said on Tuesday that the economy appeared to have hit bottom and was showing signs of recovery.
He said stimulus measures the government had introduced earlier this year to prop up capital investment, such as interest rate cuts and higher fiscal spending, would begin yielding results in the second half.
The government has forecast the economy will be five percent larger next year than in 2003, when it is estimated to be up 3.5 percent on last year. The economy grew 6.3 percent between 2001 and 2002.