Economic growth slows in 3rd quarter

By Kim Jae-kyoung

The Korean economy’s third-quarter growth was the slowest in one year, with exports, its main growth engine, losing steam due to the strengthening of the Korean won and a slowdown in major economies, including the U.S. and China.

The economy is expected to lose momentum further in the coming quarter, with the effect of the government’s fiscal stimulus waning amid lingering uncertainties overhanging the global economy.

The Bank of Korea (BOK) reported Wednesday that the nation’s gross domestic product (GDP) expanded 0.7 percent in the third quarter from the previous quarter’s 1.4 percent growth.

It marked the slowest growth in a year since the GDP, the broadest measure of economic performance, grew 0.2 percent in the fourth quarter of last year. From a year earlier, the GDP expanded 4.5 percent.

The latest data imply that growth is losing steam due to weak overseas demand and the fact that domestic demand has become a key driver for Asia’s fourth largest economy.

“An export-led slowdown has been evident in the monthly industrial output data since April,” ING Group senior economist Tim Condon told The Korea Times.

“We ascribe it to weaker China demand. Based on today’s data we revised our full-year growth forecast to 6 percent from 6.2 percent.”

Exports, which account for about 50 percent of Korea’s GDP, gained 1.9 percent on-quarter after expanding 7 percent three months earlier. But private spending rose 1.3 percent, accelerating from a 0.8 percent expansion.

Morgan Stanley economist Sharon Lam said, “Growth rate normalization is totally anticipated due to the base effect and will continue until the first quarter of 2011. Today’s data confirmed that domestic demand was the key growth driver, and I expect it to remain so into next year.

“Consumer spending will remain a major growth driver in 2011 on the back of lower unemployment, stronger income, and a possible rebound in the property market. Inflation could be the biggest risk to consumption going forward.”

In its report, Nomura forecast that the GDP will decline 0.1 percent in the fourth quarter.

“Weaker exports and a slump in housing activity, along with inventory adjustment, will likely result in a slight decline in the fourth-quarter GDP,” Nomura economist Kwon Young-sun said.

“There are other indicators that also point to a likely weakening of momentum in the short term — a further slowing of the OECD leading economic indicator and a higher inventory/shipment ratio,” he added.

Analysts said that the slowing economy is likely to make it harder for the central bank to find the timing for another rate hike.

“Predicting BOK’s next rate move has become a very difficult job. I think the BOK has already missed the best timing for rate hikes this year.It is more difficult for them to justify rate hikes for the rest of this year when headline macro data is softening from previous quarters,” Lam said.

“Nonetheless, I keep my view that it should raise interest rates in order to cope with inflation risks as the central bank needs to be forward looking,” she said.

In the meantime, the BOK forecast that the Korean economy is expected to grow around 6 percent this year unless it posts a contraction in the fourth quarter.