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South Korea's 2018 GDP growth slows to six-year low, trade woes dim outlook

SEOUL (Reuters) - A surge in government spending boosted South Korea’s economy in the fourth quarter but weakening exports braked last year’s annual pace of growth to a six-year low, underlining a dimming outlook in the face of a slowdown in key trade partner China.

FILE PHOTO: A crane moves a shipping container at a container terminal at Incheon port in Incheon, South Korea, May 26, 2016. REUTERS/Kim Hong-Ji

Tuesday’s Bank of Korea GDP report showed growth of 1 percent in the fourth quarter, the fastest in three quarters as the economy rode a spurt in government stimulus. Seoul increased spending by 3.1 percent on-quarter, the biggest rise in almost nine years and helped boost construction and capital investment.

The advance estimates beat the median forecast of 0.6 percent in a Reuters survey, as did the fourth quarter’s annual pace at 3.1 percent, handily outpacing the 2.0 percent rate in the third quarter and marking the fastest expansion in just over a year.

Yet, some of the promising fourth quarter figures did little to mask a gloomy outlook, as exports declined 2.2 percent on-quarter and remained the biggest risk for South Korea’s trade-reliant economy as growth in its biggest market China cools.

“With growth in China and the U.S. (South Korea’s two largest trading partners) set to slow in 2019, the outlook for the South Korean export sector is challenging,” said Krystal Tan, economist at ANZ.

“Heightened uncertainty about global demand and the maturing global tech cycle will in turn keep private investment weak.” Indeed, the full year number told a story of increasing strain across the economy. Growth was 2.7 percent for the whole of 2018, the slowest expansion in six years but matching the 2.7 percent rate projected by the central bank.

The BOK said Asia’s fourth largest economy would have contracted in the fourth quarter without government spending, and its contribution to GDP in the fourth quarter was wiped by declining exports.

“Increased fiscal spending towards the year end has cushioned the blow to exports, as shipments of chips and electronic products are falling,” a central bank official said.

Construction investment climbed 1.2 percent in the fourth quarter while capital investment jumped 3.8 percent, the sharpest increase in six quarters.

Private consumption expanded at double the pace seen in the third quarter with a 1 percent growth rate.

CHINA RISK

Investors worry a slowdown in the Chinese economy and the Sino-U.S. trade war could severely dent global growth and demand for key South Korean exports items including memory chips and petrochemical products.

The weakness in China -- which has generated nearly a third of global growth in recent years -- is already weighing on profits for firms ranging from Apple to big carmakers.

South Korea’s December exports unexpectedly slipped as shipments to China declined 14 percent on-year, the fastest fall in more than two years. The domestic jobs market is also at its weakest in years, with unemployment at a 17-year peak.

And the prospects for manufacturers globally don’t look good as demand from China’s economy, which grew an annual 6.6 percent in 2018, the slowest pace in almost three decades, slackens further.

Taiwan, another key export-hub, on Monday reported its export orders falling the most in over 2-1/2 years in December on weak global demand for electronic gadgets.

In South Korea, some of is major manufacturers are already feeling the strain of weakening growth in China. Blaming fragile chip demands, global tech titan Samsung Electronics 005930.KS earlier this month flagged a significant drop in its fourth quarter profit and warned of tough conditions ahead.

The pressure on the South Korean economy is expected to persist over coming quarters, with a Reuters poll predicting 2019 growth of 2.5 percent. That is likely keep the central bank sidelined after it raised rates in November mainly to contain a boom in parts of the nation’s property market.

The Bank of Korea holds its first meeting for the year on Thursday.

Editing by Shri Navaratnam

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