South Korean Economy: Economy Slows with Lower Exports and a Declining GDP

Seoul, 24 Oct. As economies slow worldwide, export-driven South Korea announces it is officially now one of them, reporting decreased exports and declining gross domestic product figures.

South Korea’s export-driven manufacturing industries – mainly automobiles and electronics – contribute to about 25% of the nation’s GDP. Domestic private consumption generates a bit more than half it.

Seoul, 24 Oct. As economies slow worldwide, export-driven South Korea announces it is officially now one of them, reporting decreased exports and declining gross domestic product figures.

South Korea’s export-driven manufacturing industries – mainly automobiles and electronics – contribute to about 25% of the nation’s GDP. Domestic private consumption generates a bit more than half it.

According to South Korea’s central banks, the economy grew a seasonally-adjusted 0.6% in Q3, as per expectations. This is the slowest quarterly growth since Q3 of 2004 which expanded only 0.5%.

A Reuters poll of 13 economists reported that the nation’s gross domestic product was forecast to have expanded 0.6% during the July-September period from the earlier quarter.

Growth in exports, services, and manufacturing suffered, while construction actually shrank. According to the Bank of Korea, the gross domestic product of Asia’s fourth-largest economy grew 3.9% in the July-September period in comparison with the same period the previous year. Q2 growth was 4.8%.

The Bank of Korea attributed the growth to, “the sluggishness in cars, semiconductors and computers.” According to Oh Suk-tae, a Citibank Korea economist, Q3’s 0.6% rate equaled a 2.3% growth on an annualized basis. Oh noted that the 3.9% growth number was the lowest since 2005’s Q2.

“Everything is bad,” Oh remarked of the growth announcement. “The weakness in exports and [the] manufacturing sector clearly shows the impact of the global economic slowdown.”

Helen Hwang, of Woori Investment and Securities, commented, “The GDP figure came in slightly lower than our expectation for 4.1 percent year-on-year. We believe the fourth quarter figures will be weaker, due to poor domestic demand and further downward pressure on exports. We expect interest rates will be cut by another quarter point in November.”

It is expected that the South Korean growth will contract even more in 2009 on continuing slowing exports and a reduction in domestic demand. This could very well lead to further interest rate cuts. The Bank of Korea has already cut rates by 25 basis points to 5%, in view of the growing global financial crisis.

This thought was echoed by Hyundai Securities economist Lee Sang-Jae. Lee said, “I expect economic growth in the fourth quarter to remain low. The export-driven domestic economy is expected to continue its downward spiral amid the global financial crisis. I believe the benchmark interest rate is still high. In order to boost the domestic economy, the government needs to implement more efficient fiscal expansion policies.”

Lee continued, “The Bank of Korea needs to cut rates to as low as four percent by early next year if it is to inject more liquidity in the domestic market amid deepening financial woes.”

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