SEOUL, Oct 1: South Korea’s September exports posted their biggest annual drop in seven months while consumer inflation eased to a 14-year low, likely keeping the policy rate near all-time lows as a firm recovery for the trade-dependent nation looks far from assured.
With Europe still in the doldrums, China’s growth-rebound in its infancy and the U.S. Gearing to turn off the tap on cheap dollars, Asia’s fourth-largest economy faces an uncertain outlook.
‘Headline exports underperformed against market expectations, suggesting that the growth outlook remains challenging,’ ANZ bank economists said in a report.
‘Inflation is not a concern, offering some freedom for the central bank to remain accommodative,’ they said.
Data released by the Ministry of Trade, Industry and Energy on Tuesday showed that overseas shipments in September fell 1.5 percent from a year earlier, the sharpest contraction since February. This was weaker than a 2.0 percent rise tipped in a Reuters survey of economists and the 7.7 percent rise in August.
Annual inflation eased to 0.8 percent, its weakest level since September 1999 and slipping further below the central bank’s 2.5 percent-3.5 percent target band. The inflation reading was also weaker than any individual forecast in a Reuters survey of economists.
‘Construction investment and domestic consumption are all suffering,’ said Kiwoom Securities analyst Ma Ju-ok. ‘If you don’t have demand then it will be hard for inflation to pick up.’
The economy’s pedestrian growth rate was underlined this week when President Park Geun-hye backed away from a pledge to balance the budget within her five-year term, as tax revenue is expected to fall 7 trillion won) to 8 trillion won ($6.51 billion-$7.45 billion) short of target.
Moreover, the jolt to the economy from this year’s 5.3 trillion won government stimulus package is expected to fade in the fourth quarter, while policymakers and economists say the firm August industrial output data released on Monday won’t be enough on its own to suggest a full recovery.
All of this means the Bank of Korea will likely keep the benchmark rate at a near historical low of 2.50 percent well into 2014. The central bank, which last eased the policy rate by 25 basis points in May, stood pat in September for the fourth consecutive month.
While the BOK has given no indications that it is contemplating any near-term moves, some analysts say that another rate cut cannot be ruled out.
‘I believe that a rate cut is possible once a new Bank of Korea Governor takes office,’ SK Securities analyst Yum Sang-hoon said. Current BOK Governor Kim Choong-soo’s term ends at end-March 2014.
Although a majority don’t expect the BOK to cut rates again, dealers say Korean authorities have been quite active in the currency market, intervening to keep the won from rising too sharply to minimise erosion of price competitiveness for local exporters.
To be sure, the September exports data was skewed as the long Chuseok holiday break this year led to fewer working days in the month compared to a year earlier. The trade ministry said it expects exports to grow in annual terms in October, without giving a specific target.
‘We’ll need to see October’s numbers to be more certain, but exports are slowly getting better,’ HI Investment economist Park Sang-hyun said, noting that external conditions continue to improve.
The economy has also been recovering in recent quarters, but analysts remain sceptical that the government’s 3.9 percent growth forecast for next year is achievable.
Sequential gross domestic product growth for the second quarter accelerated to 1.1 percent from 0.8 percent in the January-March quarter, and expectations are that the impact of the government’s stimulus will likely see firm growth for the July-September period as well.
Beyond that, the outlook is less certain. The expected tapering of the U.S. Federal Reserve’s massive bond-buying stimulus in coming months further muddies the picture.
On top of that, manufacturers are still reporting low activity, and a cut in government spending puts another dampener on growth.
The HSBC/Markit Economics purchasing managers’ index (PMI), which was also out on Tuesday, edged up to a seasonally adjusted 49.7 from 47.5 in August, suggesting some improvement but still below the 50-point mark separating expansion from contraction.
President Park last week acknowledged that weak growth, a ballooning budget deficit and the expected tax revenue shortfall this year posed challenges.
‘It’s too early to say that the Korean economy has recovered firmly,’ said HI Investment economist Park Sang-hyun.
(agencies)
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