Economic contraction supports rate hike pause

On a downturn: South Korean Buddhist monks pray at a makeshift memorial for the victims of the deadly Halloween crowd surge. Consumption in the country is weakening after the October 2022 tragedy. — AFP

SEOUL: South Korea’s economy shrank for the first time since the beginning of the pandemic last quarter, an outcome that supports the case for at least pausing a cycle of interest rate hikes to tackle inflation.

Gross domestic product contracted 0.4% from the previous three months as exports fell and consumer spending edged down, the Bank of Korea (BoK) said yesterday.

The result matched a Bloomberg survey of economists. From a year earlier, the economy still expanded by 1.4%.

BoK governor Rhee Chang-yong had flagged the possibility of a contraction earlier this month when he delivered a quarter percentage-point interest rate increase.

Recent weakness in economic activity prompted markets to interpret the hike as the final move in the current tightening cycle.

For 2022 as a whole, the economy expanded 2.6% from a year earlier, in line with an earlier BoK projection.

Still, the fourth-quarter setback for the economy is an indication of the difficulty of taming inflation while also trying to secure a soft landing amid a global slowdown.

Policymakers and economists largely expect the economy to rebound without the need for a round of extra spending from president Yoon Suk-yeol’s government.

The strength of China’s economic recovery will likely be a key factor for exports going forward, while developments in the property market number among the key areas of concern at home.

Finance minister Choo Kyung-ho acknowledged yesterday that the economy faces a “very difficult period” in the first half of the year.

South Korea serves as an early indicator of the state of the global economy as it depends heavily on international trade. The nation’s performance is closely bound up with that of major economies including China, the United States and Japan.

South Korea is also vulnerable to fluctuations in global commodity prices as it relies heavily on imports of oil and food. As rates climbed worldwide, companies reined in investment, reducing demand for South Korean products such as semiconductors, steel and displays.

An economic slowdown in China particularly hurt South Korean exports last year.

Policymakers are also concerned about the potential impact of growing US curbs on China over semiconductor exports, given South Korea has large chip making facilities in the world’s second-largest economy.

“Exports and their impact on South Korea’s growth are top of mind for policymakers,” Duncan Wrigley, an economist at Pantheon Macroeconomics, said after early trade data showed an ongoing decline in overseas shipments last week.

“South Korean exports will likely remain on a downward trend given the poor economic prospects in its major markets.”

While trade is in a downturn, consumption is weakening in South Korea, especially after an October crowd-crush tragedy that killed more than 150 people in Seoul.

Household spending had been a key driver of economic growth for most of last year following the relaxation of virus regulations.

For this year, South Korea’s economy is expected to grow slightly less than 1.7%, according to the central bank.

Inflation is seen reaching around 3.6%, it estimates.

As the outlook darkens, the BoK is winding down its 18-month tightening cycle.

The central bank’s hikes included two half-point moves last year as it sought to keep pace with the Federal Reserve’s aggressive tightening. The consensus among surveyed economists is for no more rate hikes this year.

Higher rates have strained South Korea’s credit markets and a rare default by the local developer of Legoland South Korea sent the corporate bond market tumbling last year. Deteriorating sentiment in property markets as house prices fall is another concern for policymakers.

Consumption is likely to worsen if housing prices slide further and make people feel they are becoming poorer given the share homes have in their wealth, said Ahn Dong-hyun, a professor of economics at Seoul National University.

That means the government will have to focus on ensuring a gradual slowdown for the real estate market this year.

“The most important thing for the government is to avoid a hard-landing,” Ahn said. Measures that would ease debt burdens for households would also help, he said.

The economy is more likely to return to growth in the current quarter than shrink as China regains momentum following the end of its Covid lockdowns, according to Rhee.

“Whilst we see a tailwind, a quick reversal of exports is unlikely,” Bank of America economists Kathleen Oh and Ting Him Ho wrote before the release.

“What South Korea needs eventually is China’s final external demand pick-up to strongly benefit South Korea intermediary goods exports.” — Bloomberg

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BoK , rates , inflation , GDP , exports , realestate , householdspending


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