Gloomy data fuel fears for South Korea's economy

South Korea's economy hit a snag in March as exports fell the most in two years and inflation hit a 16-year low, adding to pressure on policy makers to come up with additional stimulus measures.

The Bank of Korea cut interest rates by 25 basis points last month to a record low of 1.75 per cent amid growing concerns that growth momentum in Asia's fourth-largest economy was slowing, with sluggish domestic consumption and increasing deflationary pressure.

The central bank had forecast the economy would pick up in the first three months of the year after suffering its weakest growth in almost six years in the previous quarter, but recent data show no signs of a strong recovery.

Exports fell 4.2 per cent in March from a year earlier, the biggest drop since February 2013, while imports plunged 15.3 per cent, taking the trade surplus to a record $8.4bn.

The trade ministry blamed the poor imports on lower oil prices, but overseas sales excluding oil products and petrochemicals rose just 0.2 per cent, due to weak demand from China and Europe.

Exports to China and Europe fell 2.4 per cent and 9.7 per cent respectively, while those to the US surged 17 per cent.

Consumer prices rose just 0.4 per cent in March from a year earlier - the weakest since July 1999, following a 0.5 per cent gain in February. Consumer prices would have fallen 0.2 per cent last month excluding an increase in tobacco tax from this year.

Finance minister Choi Kyung-hwan has repeatedly expressed concerns about the possible risk of deflation while Lee Ju-yeol, the central bank governor, has dismissed such concerns as being "excessive". Korea is not alone in facing growing deflationary pressure. Japan is nearing deflation, with core consumer price inflation hitting zero in February, while Germany's inflation rate turned negative in January for the first time in more than five years.

But the Bank of Korea faces pressure to loosen monetary policy. It is expected to revise down this year's annual growth forecast of 3.4 per cent at its next policy meeting on April 9.

"There are no signs that the global trade cycle is picking up, which weighs on economic growth in Korea's trade-dependent economy," said Ronald Man, economist at HSBC. "We think officials will deliver more stimulus measures to support economic activity."

Mark Walton, economist at BNP Paribas, said the latest data should encourage another 25 basis point cut in interest rates from the central bank, most likely in May. But South Korea's high household debt may hold the central bank back from cutting rates further, said Raymond Yeung, economist at ANZ, predicting that the government's growth-stimulating efforts are likely to be made through a supplementary budget.

The Korean won rose for the first time in three days, up 0.7 per cent to Won1,102.2 per dollar, buoyed by the record trade surplus, and government bonds rose on expectations of additional monetary easing.

However, the weak economic outlook pushed the Kospi stock index 0.62 per cent lower.

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