Korea fears quarterly contraction in Q4

With the Korean economy continuing to grow less than 1 percent on-quarter since the second quarter of last year, there are increasing predictions of a quarterly contraction of gross domestic product.

International trade volumes have diminished as the world’s major economies slowed, dealing a blow to Korea’s exports and industrial production, the pivotal driving forces of its economy.

Several institutions at home and abroad say Korea could post negative on-quarter growth in the last three months of this year or the first three months of next year, depending on “external” factors.

The Korean economy grew only 0.2 percent in the three months to September compared to the previous quarter. The on-quarter growth was 0.9 percent in the first quarter and 0.3 percent in the second quarter.

“Some say the economy bottomed out in the third quarter, but under current circumstances, I don’t think so,” said Bae Sang-geun, chief of the Federation of Korean Industries’ economic division.

“It can edge along in the fourth quarter, but it is hard to rule out chances of negative growth in the first quarter of next year.”

Even if Korea manages to keep the growth rate from falling further in the last three months of the year by shoving out inventory for exports in the year-end, current economic trends show that it could turn negative, he said.

Lee Jae-joon at the Korea Development Institute said that compared to the third quarter, the economy is likely to pick up in the fourth quarter, but only provided that external conditions do not get worse.

“If the eurozone leaders fail to control their situation and head toward catastrophe, international financial markets will be knocked off like dominoes, possibly causing more than a negative growth for Korea in the fourth quarter,” Lee said.

Kwon Soon-woo of Samsung Economic Research Institute held a similar view.

“Since both exports and domestic consumption are sluggish, there is not much point in debating whether the economy hit bottom or not,” Kwon said.

“Technically, it can rebound, but I think the world and the Korean economy will continue to move at a snail’s pace for a while, rather than recover.”

Yim Jin of the Korea Institute of Finance also said that even if Korea avoids a negative growth in the fourth quarter, it should keep expectations low in the long term.

“Economic risks in Europe and the U.S. have not been cleared yet, and domestic consumption is lethargic,” Yim said.

Pundits in other think tanks such as LG Economic Research Institute and Hyundai Research Institute agreed the country’s economy was still far from a rapid recovery due to external uncertainties.

On-quarter growth may slightly pick up in the three months to December since the third-quarter growth was so low, but the economy will remain close to stagnant for a while due to a global slowdown, they said.

According to the World Trade Organization, the world’s nominal international trade volume growth quickly recovered after 2009 to 22.1 percent in 2010 and 19.7 percent last year, but plummeted to 1.7 percent on-year in the first half of this year.

The on-year global industrial output growth also slowed from 5.4 percent last year to 3.9 percent in January-July this year.

The decline in world trade and production depressed the Korean economy as reduced demand led to sullen exports and falling trade volumes hurt the nation’s shipping, shipbuilding and steel industries.

Korea’s manufacturing output growth slowed from 16.8 percent in 2010 and 7 percent last year to 2.2 percent from a year ago in January-August this year, according to Statistics Korea.

By Kim So-hyun (sophie@heraldcorp.com)