South Korean economy contracts on-quarter in Q4 as car exports slow

The Bank of Korea expects the economy to grow 3 per cent this year, and was confident enough about its progress to raise the policy interest rate in November last year.
The Bank of Korea expects the economy to grow 3 per cent this year, and was confident enough about its progress to raise the policy interest rate in November last year.PHOTO: AFP

SEOUL (BLOOMBERG) - South Korea's economic growth weakened in the final three months of last year as a fall in automobile exports overpowered an increase in shipments of semiconductors. Fewer work days also added to the contraction. That slowdown came after gross domestic product expanded in the third quarter at the best pace in more than seven years.

Gross domestic product contracted 0.2 per cent in the three months through December from the previous quarter, when it grew 1.5 per cent, the Bank of Korea said on Thursday (Jan 25).

That drop is the worst result since the final quarter of 2008, when it contracted 3.3 per cent.

The median estimate of economists surveyed by Bloomberg was for 0.1 per cent growth.

From a year earlier, economy expanded 3 per cent, missing economists estimates of 3.4 per cent growth.

Even with this surprise contraction, the economy has been benefiting from the prolonged growth in the value of exports of things like semiconductors and electronics, with the total value of all shipments hitting a record in 2017. Reflecting that, the Bank of Korea expects the economy to grow 3 per cent this year, and was confident enough about its progress to raise the policy interest rate in November last year, the first increase since 2011.

President Moon Jae-in was elected last year on a platform of increasing jobs and incomes, especially for the poor, in an attempt to increase domestic consumption. Private consumption rose 1 per cent in today's data, slightly up from the previous period.

"Just looking at the fourth quarter data may be misleading," said Chung Kyu Il, the director general of the economic statistics department at the Bank of Korea. In the second half of 2017 the economy expanded by 3.4 per cent and this indicates Korea's steady economic growth, he said.

A long holiday at the start of October and base effects coming from strong third-quarter GDP results is behind the contraction, said Chung, speaking at a briefing following the data release.

Korea's economic recovery shouldn't be seen as coming to an end just because of the fourth-quarter GDP results, said Park Jeong-woo, an economist at Korea Investment and Securities.

Private consumption is up along with growth in wages, which is positive, said Park.

Exports weakened in the fourth quarter, but that's "likely because of the long holiday in October and a slump in sectors including automobiles and ships," Park said.

Exports measured by volume declined 5.4 per cent in the fourth quarter from the previous three months, according to the BOK.

Government spending increased 0.5 per cent from the third quarter, while private consumption gained 1 per cent.

Construction investment was down 3.8 per cent with facilities investment falling 0.6 per cent.