South Korea’s economy decelerates amid slowing exports, weakening currency

South Korea’s inflation reached the highest level in 24 years in the July-September period and remains elevated this quarter. PHOTO: AFP

SEOUL – South Korea’s economic growth decelerated in the last quarter in response to slowing exports and a weakening currency, a result that is unlikely to prevent its central bank from further policy tightening.

Gross domestic product rose 0.3 per cent in the three months to September from the previous quarter, the Bank of Korea (BOK) said on Thursday, matching economists’ estimates. From a year earlier, GDP advanced 3.1 per cent.

Pressure is building on the Korean economy as rates rise rapidly and stalling export growth sees trade deficits accumulate. This is partly why the won is weakening to levels last seen in the 2008-2009 financial crisis, driving up import costs and exacerbating inflation.

South Korea’s inflation reached the highest level in 24 years in the July to September period and remains elevated this quarter, keeping the BOK on a tightening path. The central bank raised rates by a half percentage point in July and October, seeking to keep its policy gap with the Unites States Federal Reserve from widening too much and putting more pressure on the won.

“The latest numbers are unlikely to sway the BOK’s monetary policy, given that its focus remains on inflation and financial stability, including the currency,” said KB Kookmin Bank chief economist Chang Jae-chul. “With one month left until the next decision, the possibility remains open to either a 25- or 50-basis point hike.”

Higher rates have strained South Korea’s credit markets, and a rare default by a local developer sent the corporate bond market tumbling this month. The government has stepped in with a pledge to supply at least 50 trillion won (S$49.6 billion), seeking to bolster confidence among investors.

Deteriorating sentiment in financial markets is likely to persist as the BOK remains committed to boosting borrowing costs. Consumers face an increasingly challenging environment, with inflation and higher rates eroding their purchasing power. 

The won, meanwhile, is the worst-performing currency after the yen in Asia this year.

The government also plans to keep its fiscal spending restrained after unprecedented stimulus to keep the economy afloat during the pandemic. The authorities have relaxed Covid-19 regulations significantly to support more private activity and boost consumption.

From the previous quarter, private consumption rose 1.9 per cent, while government spending was up 0.2 per cent. Exports advanced 1 per cent and facilities investment expanded 5 per cent.

But imports grew 5.8 per cent, outpacing exports by a large margin. As a result, net exports detracted 1.8 percentage points from GDP growth. BLOOMBERG

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