Weak exports weigh on S Korea GDP

South Korea's economy grew at an annual pace of 3.2 per cent in the third quarter of this year, the central bank said on Friday, with weak exports to China offset by rising private consumption.

April's Sewol ferry disaster had been widely blamed for slowing the domestic economy, with consumer spending falling as the country grieved for the 304 dead - but private spending bounced back in the third quarter, growing 1.1 per cent from the previous three months, after growth of 0.5 per cent for the second quarter.

This "low base effect" from private consumption was the driver for an improved quarter-on-quarter growth rate of 0.9 per cent, said Ronald Man, an economist at HSBC. But it would be "difficult for the strong upward momentum in private consumption to be sustained", he added, noting a recent decline in consumer confidence survey data.

Annual growth in the second quarter was 3.5 per cent.

South Korea's domestic economy is benefiting from expansionary fiscal policy, two recent interest rate cuts and a boost to the property market from regulatory easing. But the country remains heavily reliant on exports, which account for more than half of gross domestic product, and which have been on an unsteady course in recent months.

Exports were 2.6 per cent down from the previous quarter and showed a year-on-year rise of 2.1 per cent - the slowest pace since early 2009. The low figures were largely due to a slowdown in China, by far South Korea's biggest export market, Bank of Korea director-general Jung Yung-taek told journalists. Exports of display panels and chemical products have been particularly weak, according to the BoK.

The struggling exports to China contrast with stronger shipments elsewhere, notably the strengthening US market. In the year to September 20, South Korean exports to the US and EU grew by 9.7 per cent and 9 per cent respectively, while sales to China fell by 0.3 per cent.

Sluggish exports, coupled with foreign selling of South Korean equities, have eroded recent strength in the South Korean won. The currency strengthened against the US dollar by 11 per cent in the year to July 1 but has since retreated by nearly 5 per cent.

"The weakening Korean won will improve the price competitiveness of underperforming exporters, while global demand should strengthen [next year] on the back of faster US growth and a recovery in China," said Matthew Circosta, an analyst at Moody's Analytics.

Mr Circosta added that the improving domestic performance "raises questions" about whether recent monetary and fiscal stimulus measures were necessary.

This month the BoK cut the benchmark interest rate for the second time in three months, after the finance minister called for "harmony" between monetary and fiscal policy, which has been increasingly focused on boosting growth.

In July the government revealed a stimulus package with a headline figure of $40bn, and two months later said that government spending would increase in 2015 by 5.7 per cent.

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