Hanjin Shipping’s container terminal is seen at the Busan New Port in Seoul. South Korea’s economic growth quickened in the third quarter as government and consumer spending rebounded, but exports were knocked by cooling global growth.
South Korea’s economic growth quickened in the third quarter as government and consumer spending rebounded, but exports were knocked by cooling global growth, a sign that more monetary easing may be required to sustain a fragile recovery.
Underscoring the tenuous economic momentum, the Bank of Korea said a large part of the consumption uptick was merely payback from a slump in the second quarter, when a ferry accident dented domestic travel and retail spending.
That took some of the shine off yesterday’s BoK data showing the economy grew a seasonally adjusted 0.9% in July-September from the second quarter. It followed a 0.5% rise in the second quarter and matched the median 0.9% forecast in a Reuters survey of 21 analysts.
“(Third-quarter growth) was driven by domestic components, following weak readings in the previous quarter. But trade contracted and consumer confidence has not picked up meaningfully,” said HSBC economist Ronald Man in a note.
“This suggests that policymakers in Korea will maintain an accommodative stance to support growth and we forecast the Bank of Korea to hold its policy rate at 2% over the foreseeable future.”
Policymakers will be particularly concerned by data showing weaker sales abroad dampened spending on production equipment, suggesting a fragile economic recovery after growth slowed to its weakest pace in nearly two years in the June quarter.
“South Korea is doing relatively well compared to other countries but growth is not yet firm,” said BoK Governor Lee Ju-yeol during a meeting with local conglomerate CEOs yesterday.
“Despite questions on what may happen to household debt, we lowered rates because it was important we keep the spark of recovery alive.”
The Bank of Korea has cut interest rates by 50 basis points to match a record-low 2% in two moves this year.
After the latest cut earlier this month, the central bank gave no clear signal that its easing cycle had ended, keeping the door open for another reduction.
The export-reliant economy, home to global titans such as the world’s biggest smartphone maker, Samsung Electronics, and car maker Hyundai Motor, has struggled since April from the effects of the ferry disaster and sluggish export growth.
On Thursday, Hyundai reported a 29% year-on-year fall in quarterly net profit, hit by a strong local currency and slowing sales in its key US and South Korean markets. While Asia’s fourth-largest economy is seen to have passed a trough in the second quarter, analysts worry a tottering global economy could hamper the recovery. Highlighting global uncertainties, Friday’s data showed exports fell 2.6% from the previous three months, the first quarterly decline since the third quarter of 2013, when they dropped 1.1%. A cooling Chinese economy and the threat of recession in Europe have raised doubts about global demand.
“As exports out of China weaken, our shipments are declining as well because South Korea mainly exports intermediate products to China,” Jung Yung-taek, head of the central bank’s statistics department, told reporters.
South Korea’s manufacturing activity shrank in September to the lowest in three months as domestic and export demand cooled, a survey found earlier this month.
And industrial output in August had its worst monthly fall since the 2008 global financial crisis.
Despite cutting rates to shore up momentum, the full benefits of the BoK’s monetary medicine won’t be evident until the end of the fourth quarter, or early next year, due to the lagged transmission effects on the real economy.
A raft of new policies launched by Finance Minister Choi Kyung-hwan after he took office in July would also have provided only a modest boost to growth in the third quarter, as the bulk of the measures still need parliamentary approval.
From a year earlier, South Korea’s gross domestic product rose 3.2% in the September quarter, below an expected 3.3% and slowing from a 3.5% increase in the second quarter.
The Bank of Korea estimated private consumption gained a seasonally adjusted 1.1% in the third quarter after a 0.3% decline in the second. Capital investment fell 0.8%, after a 1.1% rise in the second quarter.
