Bloomberg News

South Korea Economic Growth Slows as Companies Cut Spending

October 26, 2011

(Updates with economist’s comment in third paragraph.)

Oct. 27 (Bloomberg) -- South Korea’s economy grew at a slower pace in the third quarter as companies cut spending on concern that Europe’s debt crisis and a faltering U.S. economy will hurt business.

Gross domestic product expanded 0.7 percent from the second quarter, when it gained 0.9 percent, the central bank said in Seoul today. That compares with the median 0.6 percent estimate of 12 economists surveyed by Bloomberg News.

“The economy seems to be holding up although it’s too early to get a clear picture of where it’s heading until we see how the European debt situation pans out,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “But slower growth will add pressure on the central bank not to hike interest rates any more this year.”

South Korea has paused for four months in raising rates, the longest gap since tightening began in July last year. Maintaining growth may continue to take precedence over countering inflation, with the central bank saying Oct. 13 that “downside risks” have increased because of Europe’s crisis and signs of sluggishness in developed economies.

Inflation remains above the Bank of Korea’s target ceiling of 4 percent, with consumer prices rising 4.3 percent in September from a year earlier. August’s 5.3 percent gain was the biggest in three years.

The economy expanded 3.4 percent from a year earlier, the same pace as the second quarter, today’s report showed.

Fourth-Quarter Improvement

Growth is expected to improve “significantly” in the fourth quarter on better weather, steady exports and a rebound in the U.S., Kim Young Bae, an official at the Bank of Korea, told reporters in Seoul after the announcement.

Still, it will be difficult to meet the central bank’s July full-year forecast of 4.3 percent expansion as the economy slowed more than expected in the third quarter, Kim said.

Barclays Capital said today it’s maintaining its full-year growth estimate of 4 percent. Expansion will slow to 3.5 percent next year a slowdown abroad hits the domestic economy, Singapore-based economists Wai Ho Leong and Joey Chew said in an e-mailed report.

The won rose 0.2 percent to 1,130.15 per dollar as of 9:41 a.m. in Seoul, while the benchmark Kospi stock index gained 0.4 percent. The currency fell 9.4 percent in the third quarter, the worst performer among Asia’s 10 most-used currencies, according to data compiled by Bloomberg.

Investment Drops

A falling won may help exporters by making their products more competitive overseas, said Kwon Young Sun, a Hong Kong- based economist at Nomura Holdings Inc.

Posco, the world’s third-biggest steelmaker, said Oct. 21 that it plans to cut spending and reduce costs after third- quarter profit plunged on weaker demand.

Exports increased 2 percent in the third quarter from the second, when shipments of goods and services gained 1.2 percent, today’s report showed. Corporate investment in facilities fell 0.4 percent from the previous quarter, when it rose 3.9 percent, while private consumption increased 0.6 percent after advancing 0.9 percent.

The Bank of Korea yesterday secured its second currency- swap agreement in a week to shield the nation from any fallout from Europe’s fiscal woes and the global slowdown.

South Korea and China agreed to almost double their won- yuan swap line to 64 trillion won ($56.8 billion) from 38 trillion won. A similar deal was signed with Japan on Oct. 19.

--With assistance from Jiyeun Lee in Seoul. Editors: Nerys Avery, Paul Panckhurst

To contact the reporter on this story: William Sim in Seoul at

To contact the editor responsible for this story: Paul Panckhurst at

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