Trade wars, slowing consumer demand dampen South Korea's economy

Growth in the third quarter was slower than analysts had predicted.

    South Korea's trade-dependent economy slowed to a 0.4 percent growth rate in the third quarter as it suffered from the effects of the US-China dispute [File: Kim Hong-Ji/Reuters]
    South Korea's trade-dependent economy slowed to a 0.4 percent growth rate in the third quarter as it suffered from the effects of the US-China dispute [File: Kim Hong-Ji/Reuters]

    South Korea's economy is highly exposed to the ongoing global trade wars, and its latest growth figures show how the disputes are affecting its performance.

    Growth slowed more than expected in the third quarter, and though exports showed some signs of recovery, the overall outlook was clouded by a domestic spending slump and intensifying global trade frictions.

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    The Bank of Korea's advance estimates showed on Thursday that the economy grew by 0.4 percent during the July-September period compared with the previous three months, down from a 1 percent rise in the second quarter. The latest figure just missed a 0.5 percent gain forecast in a Reuters survey of 26 economists.

    South Korea's economy has been among those worst-hit by cooling global demand as a prolonged US-China tariff war disrupted world supply chains in a blow to business confidence and investment. A months-long trade spat with Japan has also added to strains on Korean exporters.

    Despite those constraints, the latest data show exports rose 4.1 percent in the third quarter after a 2 percent gain in the second quarter, which reversed a successive run of contractions for two quarters. But private consumption grew just 0.1 percent and construction spending tumbled 5.2 percent.

    Economists said exports, the most important driver of growth for Asia's fourth-largest economy, appeared to have clearly passed the worst, although a sure-footed recovery in the economy would require more policy support.

    "Today's data means this year's growth will be 1.7 percent or 1.8 percent at most, but the economy is probably at or past the bottom as the global IT cycle is showing signs of recovery," said Yoon Ji-ho, chief strategist at eBest Investment and Securities.

    The exports recovery in the gross domestic product (GDP) data, which are volume-based, contrasts with the still poor monthly shipments in US dollar value, although the two sets of data tend to converge over time.

    GDP represents the total value of a country's finished goods and services in a given period.

    Compared with the same period a year ago, the economy grew by 2 percent, bringing the average for the January-September period at 1.9 percent, down from a 2.6 percent gain for the same period in 2018 and compared with the central bank's 2.2 percent growth projection for the whole of this year.

    Markets reacted cautiously to the GDP report, with the won up slightly, while bond futures and stock prices edged down after the first hour of trading.

    Central bank open to more easing 

    Economists are predicting South Korea's GDP to grow by about 2 percent for the whole of this year, the latest Reuters poll showed, well below the 2.7 percent pace in 2018 and marking the worst in several decades excluding global or regional crisis-hit years.

    The government has responded with an extra $5bn stimulus plan while the central bank has trimmed its policy interest rate twice in three months to 1.25 percent, matching a record low seen until late 2017.

    The Bank of Korea has left the door open to further easing although another cut is not expected soon. The next policy meeting, the last of 2019, is on November 29.

    On Tuesday, President Moon Jae-in urged the parliament to approve the government's budget bill for next year, which proposes a 9.3 percent increase in spending from this year, saying it was time for fiscal policy to play the leading role.

    "The global economy has worsened rapidly, and our economy, heavily trade-dependent, is also in a grave situation," Moon said.

    South Korea's fiscal position remains strong in comparison to its global peers, with the government debt ratio at less than 40 percent of annual GDP versus more than 100 percent for many of the major economies.

    Opposition parties and critics have also blamed the economic slowdown on the negative effects of some of Moon's radical policies.

    Since taking office in May 2017, Moon's government has raised minimum wages by almost 30 percent in two years, sharply cut the maximum amount of mortgage loans that homeowners can borrow and reduced the legal weekly work hours.

    SOURCE: Reuters news agency