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South Korea’s Economy: Under Pressure?

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Pacific Money

South Korea’s Economy: Under Pressure?

Despite better than expected numbers for the first three months of 2013, challenges remain.

Despite months of tension on the Korean Peninsula, South Korea’s economy recorded a small but significant quarter-on-quarter (QonQ) GDP rise of 0.9% for the first 3 months of the year, according to the Bank of Korea. As the report makes clear, this is the highest quarterly growth in two years.

The news will come as a relief to new president Park Geun-hye, who has had a difficult first two months in office with South Korea’s troublesome northern neighbor distracting from the economic slowdown afflicting the country.

One of South Korea’s main economic weaknesses is its reliance on exports.  Exports make up about a third of the country’s GDP so ongoing issues in the EU, the U.S., and China continue to damper future forecasts despite the fact that exports grew slightly in the first three months of 2013. 

Another concern for South Korean exporters is the collapse in the value of the Japanese Yen since “Abenomics” began to be implemented. From highs of 1USD:78Yen in the autumn, the Yen has touched the 1USD:100Yen mark more than once.  Many of the top Korean export brands, such as Hyundai and Samsung, compete directly with Japanese brands across the globe.

Indeed, Hyundai’s first quarter bottom line fell 15 percent year-on-year in results announced on Thursday. The net profit of 2.1 trillion Won (US$1.9 billion) was partly blamed on the relative strength of Seoul’s currency, as well as troublesome union activity at home during the period.  

Hence there are still concerns that growth in the South Korean economy may be under pressure in future months.  Low consumption at home combined with the uncertain outlook abroad and a relatively strong Won provide much ammunition to those calling on the Bank of Korea to cut interest rates again, after 6 months of holding steady. 

This latest GDP figure provides some support for the Bank’s Governor Choongsoo Kim, who has stayed firm despite the growing calls for action on rates. Kim highlighted the weak Yen as a concern and, according to Bloomberg, suggested that “financial support” would be provided to vulnerable exporters rather than a tit-for-tat devaluation. 

Indeed, some explain South Korea’s low consumption as being the result of very high levels of private debt causing a drag on household spending.  If this is the case, then an interest rate cut may exacerbate that problem by allowing even more debt to be accumulated. Such a move would provide a short term boost to falling consumption, but only at the cost of longer term pain. 

With this in mind, the latest GDP growth data will provide an extra piece of ammunition for those on the “hold” side of the monetary policy debate. This is especially true given that President Park announced a US$15 billion budget stimulus package earlier this month.