Korea growth may slow, pressing BOK to hold key rate longer

South Korea’s growth probably moderated in the third quarter as a faltering global economy damped demand for Asian exports, putting pressure on the central bank to extend a pause in raising rates.

Gross domestic product expanded 0.6 percent from the second quarter, when it gained 0.9 percent, according to the median of 12 estimates in a Bloomberg News survey. The report will be released at 8 a.m. tomorrow in Seoul. From a year earlier, the economy grew 3.4 percent, according to the survey.

Europe’s failure to resolve its debt crisis and a weakening U.S. recovery have escalated Asia’s shift away from fighting inflation to protecting growth, as China reported a slower expansion last quarter and Taiwan was likely to join South Korea in doing so this week. India, the only major regional economy to tighten monetary policy in recent weeks, signaled yesterday it’s nearing the end of its record cycle of interest-rate increases.

“The BOK will have to delay any rate increases as it faces a similar dilemma as its Asian counterparts over how to balance risks of lower growth and higher inflation amid high global uncertainties,” said Kwon Young-sun, a Hong Kong-based economist at Nomura Holdings Inc., Japan’s largest brokerage.

Bank of Korea Gov. Kim Choong-soo and his board held off from raising borrowing costs for the fourth straight month on Oct. 13, leaving the benchmark rate at 3.25 percent. The expansion of Asia’s fourth-largest economy this year may fall slightly short of an estimate of 4.3 percent projected in July due to weakness in the U.S. and European economies, Kim said on Oct. 21.

Growth in exports, equivalent to about half the economy, slowed to 18.8 percent from a year earlier in September from a 25.5 percent gain in the previous month. Industrial production dropped 1.9 percent in August from July, when it decreased 0.3 percent.

South Korea’s POSCO, Asia’s biggest maker of stainless steel, said on Oct. 21 it will cut spending and reduce costs after third-quarter profit plunged 75 percent from a year earlier. Steel prices are falling due to reduce demand from countries including China and India, squeezing the profits of steelmakers.

A falling won will likely help the nation’s exporters by making their products more price competitive overseas, said Nomura’s Kwon.

The currency has weakened 6.5 percent over the past three months, the second-worst performer in Asia. It rose 0.5 percent yesterday to close at 1,129.16 per dollar in Seoul, according to data compiled by Bloomberg.

Other recent data suggest that consumers are continuing to spend. Output in the service sector gained 4.8 percent from a year earlier, while sales of consumer goods increased 5.2 percent, according to data released last month.

“The economy seems to be slowing but is holding up as exports and local demand are still doing okay,” said Lee Sang-jae, an economist at Hyundai Securities Co. in Seoul.

Inflation remains above the Bank of Korea’s target ceiling of 4 percent target. It was at 4.3 percent from a year earlier last month, moderating from August’s 5.3 percent, the highest in three years. 

(Bloomberg)