Japan and South Korea reported surprisingly weak July factory output on Wednesday as global electronics demand faded, exposing Asia's vulnerability to a worsening U.S. and European economic slowdown.

Industrial output rose just 0.6 percent in Japan, less than half the rate economists polled by Reuters had predicted. South Korea's declined 0.4 percent, defying expectations for a 0.6 percent rise.

I think it is time to lower our expectations on exports, said Kim Hyo-Jin, an economist at Dongbu Securities in South Korea, pointing to financial market volatility and mounting concerns that the United States and Europe could slip back into recession.

As disappointing as the data was, the next set of readings may look even worse. Consumer and business confidence cratered across most advanced economies in August, when the U.S. debt downgrade and deepening European debt crisis cast doubt on growth prospects.

A series of factory surveys due on Thursday will shed more light on how China, Taiwan and South Korea fared in August. Japan offered a sneak peak on Wednesday: its Purchasing Managers Index dipped to 51.9, the first decline in two months.

Slumping demand for computers, televisions and other electronics has put tech-centric countries including Japan and South Korea on the frontline of the global slowdown.

Unless you make iPads, it's not a great time to be in the technology sector. Taiwanese PC maker Acer Inc <2353.TW> reported its first ever quarterly loss last week. Flat-screen maker LG Display <034220.KS> plans to cut 2012 capital spending by a quarter because of poor demand.

Tech is especially sensitive to business cycle swings. Companies can put off buying new computers when demand fades. Likewise, consumers might make do with an old television set a bit longer if they are worried about their finances.

Bank of America-Merrill Lynch said its own electronics leading index turned down in August, reflecting weak orders from the United States, Europe and elsewhere.

The index was holding up fairly well but suddenly in August it turned sharply lower, which suggests the numbers could turn uglier, said Hak Bin Chua, a BofA-Merrill economist based in Singapore.

WATCH THE ORDERS

In Japan, Wednesday's data showed production of electronic components and devices fell 3.4 percent in July, one of the biggest drags on the industrial output index. The figures may deteriorate in the coming months.

Naohiko Baba, an economist who tracks Japan for Goldman Sachs, said supply constraints from the March earthquake and tsunami have largely been eliminated.

That means the initial quake recovery boost may have passed, leaving Japan even more vulnerable to weak global demand. A strong yen puts its exporters at a disadvantage.

For South Korea, where electronics account for more than one-third of exports, data from the finance ministry showed exports rose 22.9 percent from a year earlier for the August 1-29 period, a slightly slower pace than in July. A preliminary reading on the full month's figures is due on Thursday.

Judging from the mood in the United States and Europe, demand prospects look gloomy. In Germany, Europe's biggest economy, both the ZEW and the Ifo sentiment surveys showed sharp declines in August.

U.S. consumer confidence crumbled to a two-year low, according to the Conference Board. Although retail sales held up surprisingly well in July, flagging confidence suggests demand may soon slip.

Businesses seem to be worried about that. Non-defense capital goods orders excluding aircraft, which is a closely watched proxy for business spending, fell 1.5 percent in July, indicating companies are cutting back.

(Additional reporting by Kim Yeonhee and Yoo Choonsik in Seoul, and Kaori Kaneko in Tokyo; Editing by Dean Yates)

Germany Japan China Unemployment