Bloomberg News

South Korea Growth May Slow, Pressuring BOK to Extend Rate Pause

October 25, 2011

Oct. 26 (Bloomberg) -- South Korea’s growth probably moderated in the third quarter as a faltering global economy damped demand for Asian exports, putting pressure on the central bank to extend a pause in raising rates.

Gross domestic product expanded 0.6 percent from the second quarter, when it gained 0.9 percent, according to the median of 12 estimates in a Bloomberg News survey. The report will be released at 8 a.m. tomorrow in Seoul. From a year earlier, the economy grew 3.4 percent, according to the survey.

Europe’s failure to resolve its debt crisis and a weakening U.S. recovery have escalated Asia’s shift away from fighting inflation to protecting growth, as China reported a slower expansion last quarter and Taiwan was likely to join South Korea in doing so this week. India, the only major regional economy to tighten monetary policy in recent weeks, signaled yesterday it’s nearing the end of its record cycle of interest-rate increases.

“The BOK will have to delay any rate increases as it faces a similar dilemma as its Asian counterparts over how to balance risks of lower growth and higher inflation amid high global uncertainties,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc., Japan’s largest brokerage.

Bank of Korea Governor Kim Choong Soo and his board held off from raising borrowing costs for the fourth straight month on Oct. 13, leaving the benchmark rate at 3.25 percent. The expansion of Asia’s fourth largest economy this year may fall slightly short of an estimate of 4.3 percent projected in July due to weakness in the U.S. and European economies, Kim said on Oct. 21.

Export Growth Slows

Growth in exports, equivalent to about half the economy, slowed to 18.8 percent from a year earlier in September from a 25.5 percent gain in the previous month. Industrial production dropped 1.9 percent in August from July, when it decreased 0.3 percent.

In China, the economy expanded 9.1 percent in the third quarter from a year earlier, the least in two years, as export growth moderated. Taiwan’s GDP growth probably slowed to 3.65 percent from a year earlier after 5.02 percent in the second quarter, according to the median of eight estimates in a Bloomberg News survey. The data will be released on Oct. 31.

South Korea’s Posco, Asia’s biggest maker of stainless steel, said on Oct. 21 it will cut spending and reduce costs after third-quarter profit plunged 75 percent from a year earlier. Steel prices are falling due to reduce demand from countries including China and India, squeezing the profits of steelmakers.

Weakening Won

A falling won will likely help the nation’s exporters by making their products more price competitive overseas, said Nomura’s Kwon.

The currency has weakened 6.5 percent over the past three months, the second-worst performer in Asia. It rose 0.5 percent yesterday to close at 1,129.16 per dollar in Seoul, according to data compiled by Bloomberg.

Other recent data suggest that consumers are continuing to spend. Output in the service sector gained 4.8 percent from a year earlier, while sales of consumer goods increased 5.2 percent, according to data released last month.

“The economy seems to be slowing but is holding up as exports and local demand are still doing okay,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul.

Inflation remains above the Bank of Korea’s target ceiling of 4 percent target. It was at 4.3 percent from a year earlier last month, moderating from August’s 5.3 percent, the highest in three years.

Taiwan’s Forecast

In Taiwan, the government in August cut its forecast for 2011 growth to 4.81 percent from 5.01 percent and said the expansion will slow to 4.58 percent in 2012. That’s less than half the 2010 pace of 10.9 percent, which was the fastest expansion in Asia behind Singapore’s, according to International Monetary Fund data.

Taiwan’s central bank last month refrained from raising interest rates, ending five straight quarters of increases. It will probably keep policy on hold through the second quarter of next year, according to a Bloomberg survey of 11 economists.

Export orders and industrial production in the island both increased at the slowest pace in two years in September, government data showed this month. Taiwan’s Acer Inc., the world’s fourth-largest computer maker, last week posted a second straight quarterly loss after its market share fell following inventory writedowns.

--With assistance from Chinmei Sung in Taipei. Editors: Ken McCallum, Patrick Harrington

To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net; Sarina Yoo in Seoul at kyoo3@bloomberg.net

To contact the editor responsible for this story: Ken McCallum at kmccallum4@bloomberg.net


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