By Kim Tong-hyung
Growth in the Korean economy pulled back sharply in the fourth quarter of 2011 to cap off a disappointing year as worsening global conditions took their toll on exports and consumer spending.
The gross domestic product (GDP) grew 0.4 percent in the three months through December from the preceding quarter, representing its slowest pace in two years, as the country’s export-dependent economy began to show the strains of the eurozone debt crisis and sluggishness in its main markets, the United States and China.
Year-on-year, the 3.4 percent expansion during the fourth quarter was down from the 3.5 percent increase measured in July to September, according to the Bank of Korea’s (BOK) advanced estimate. For the whole of 2011, the economy grew 3.6 percent, taking a significant shaving from the 6.2 percent rise in 2010.
The grim GDP numbers underline the fragility of the recovery in an election year and pile pressure on policymakers to navigate the economy out of its glacial state.
Interest-rate setters at the BOK have left the policy rate at 3.25 percent for seven consecutive months, despite uncomfortable levels of inflation, as subduing economic activity and heightened uncertainty surrounding the world economy dissuaded them from hiking it.
The central bank late last year had projected a 1 percent rise for the fourth-quarter GDP and a 3.8 percent growth for the full-year 2011.
“The effect of the eurozone sovereign debt crisis on corporate investment and consumption was worse than feared. It remains to be seen whether the economy will manage to distance itself more from these negative factors in the first quarter, although GDP measurements may rebound on a base effect alone,” said Kim Young-bae, who heads BOK’s economic statistics division.
“The level of consumption was much lower than anticipated as the credit downgrade in the U.S. and fiscal crisis in Europe let air out of the stock market, affecting spending on cars and other goods. An abnormally warm December also led to a decline in fuel consumption. We must hope that consumption in the first quarter benefits from slowing inflation.”
As the U.S. and China experience curbed economic activity and Europe attempts to pull back from the brink of chaos, Korea is again reminded of the downside of being a one-trick pony.
Exports, which account for about half of the GDP, dropped 1.5 percent in the fourth quarter after expanding 2.2 percent in the previous quarter, as companies here struggle to cope with slowing global demand for their products.
Households have been failing to pick up the slack as they continue to sink under a sea of debt and get no relief from stagnant wages, high unemployment and the rising costs of living. Private spending declined 0.4 percent in the fourth quarter, marking the first quarterly contraction since the first three months of 2009.
Confidence has been evaporating fast. The monthly business survey index (BSI) announced by the Federation of Korean Industries (FKI), a lobby group for big businesses, came in at 91 for January, marking the fourth consecutive month of a below-100 reading. A BSI reading below 100 means pessimists outnumber optimists. The poll surveyed the country’s 600 largest businesses in terms of sales.
The weakened vibrancy in exports has authorities here expecting the current account balance to swing into the red in January, which would mark the first time that has happened since the same month of 2010.
Due to high oil prices and a stronger local currency, Korea’s imports jumped 19.8 percent on-year to $32.03 billion in the first 20 days of January. Exports rose 5.9 percent to $29.1 billion, bringing its trade deficit to $2.93 billion, according to data available at the Korea Customs Service.
For the country to avoid seeing its first current account deficit in two years, exports will need to outpace imports by more than $3 billion for the rest of the month, something the majority of observers say is unlikely.
Entering 2011, the Lee Myung-bak government bullishly forecast annual economic growth of 5 percent, a target the country missed by a full point. There are no such bold predictions for 2012, when survival will be considered the new revival.
In offering a gloomy update on the state of the economy in December, the Ministry of Strategy and Finance dramatically reduced its growth estimates for the country and expressed alarm over the eurozone debt crisis.
The ministry now expects the economy to grow 3.7 percent in 2012, a significant drop from the previous prediction of 4.5 percent. The BOK now projects the same growth rate for 2012, a cut from its July estimate of 4.6 percent.