October 24, 2019 / 2:15 AM / a month ago

South Korea's third-quarter growth slips, global risks scar exports and economic outlook

SEOUL (Reuters) - South Korea’s economic 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.

FILE PHOTO: A container terminal is seen at Incheon port in Incheon, South Korea, May 26, 2016. REUTERS/Kim Hong-Ji/File Photo

The trade-reliant economy has been among those worst-hit by cooling global demand as a prolonged U.S.-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.

The Bank of Korea’s advance estimates showed on Thursday the economy grew 0.4% during the July-September period on-quarter, down from a 1.0% rise in the second quarter and just missing a 0.5% gain forecast in a Reuters survey of 26 economists.

Exports rose 4.1% in the third quarter after a 2.0% gain in the second quarter, which reversed a successive run of contractions for two quarters. But private consumption grew just 0.1% and construction spending tumbled 5.2%.

Economists said exports, the most important driver of growth for Asia’s fourth-largest economy, appeared to have clearly passed the trough, 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% or 1.8% 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 GDP data, which are volume-based, contrasts with the still poor monthly shipments in U.S. dollar value, although the two sets of data tend to converge over time.

Over a year earlier, the economy grew 2.0%, bringing the average for the January-September period at 1.9%, down from a 2.6% gain for the same 2018 period and compared with the central bank’s 2.2% growth projection for the whole of this year.

Markets reacted cautiously to the GDP report, with the won KRW= up slightly, while bond futures KTBc1 and stock prices .KS11 edged down after the first hour of trading.

CENTRAL BANK OPEN TO MORE EASING

South Korea’s GDP growth is forecast around 2% for the whole of this year, the latest Reuters poll showed, well below the 2.7% pace in 2018 and marking the worst in several decades excluding global or regional crisis-hit years.

The government has responded with an extra $5 billion stimulus plan while the central bank has trimmed policy interest rate KROCRT=ECI twice in three months to 1.25%, 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 Nov. 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% 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% of annual GDP versus more than 100% for many of the major economies.

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

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

($1 = 1,173.0600 won)

Editing by Shri Navaratnam

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