The country’s exports unexpectedly rose for the first time in four months, up 1.2 per cent in October from a year earlier, driven by higher demand from emerging markets. Its industrial output also posted its first monthly increase in four months, rising 0.8 per cent in September from the previous month. Meanwhile, inflationary pressure started to build up with consumer prices rising 2.1 per cent in October from a year earlier due to higher food prices, but still at the bottom of the country’s target range.
“Things have started to move up in Korea, even if not at full steam yet,” says Ronald Man, an economist at HSBC, adding that the recent data will “provide some comfort that the economy has likely bottomed out in the third quarter.”
Certainly, the data come as a relief to Korean policy makers, who have tried hard to cushion the negative impact of the global economic slowdown on Asia’s fourth-largest economy by cutting interest rates and expanding fiscal spending. Despite billions of dollars of fiscal stimulus and two rate cuts by the Bank of Korea this year, the Korean economy grew just 1.6 per cent in the third quarter, the slowest pace in three years.
However, industrial output and exports have started to pick up recently, led by resurgent electronics shipments. Exports of handsets surged 22.3 per cent and those of semiconductors grew 6.5 per cent last month, probably because of restocking, with IT giants rolling out new products such as the iPhone 5 and the iPad mini.
Some industrial sectors remain stagnant with the country’s vessel exports down 28 per cent in October, but carmakers also did better last month after the summer strikes at Hyundai and Kia, with car exports down just 2.1 per cent last month, compared with a 6.3 per cent drop in September. “Korean automakers are well positioned to sell more cars in China over the next few months, as Japanese carmakers scale down production,” says Wai Ho Leong, an economist at Barclays.
However, the economy is not out of the woods yet, warns Man at HSBC. “The recovery remains vulnerable to external shocks that could sap away optimism,” he notes. “The momentum has to be sustained through year-end to alleviate growth concerns.”
But that is a moot point. For the momentum to continue, China’s economy needs to recover as South Korea’s economy relies heavily on it’s neighbour. China is the country’s biggest export destination, taking in a quarter of its goods.
The Chinese economy is showing signs of stabilisation, but not many investors are convinced of its recovery. Korea’s other main trading partners are not in good shape either, with Europe mired in a protracted debt crisis and the US recovery still looking fragile. Furthermore, the won’s recent strength – it has gained about eight per cent since May to hit a 13-month high against the dollar – could erode the country’s export competitiveness.
The country still has enough firepower to boost the flagging growth thanks to the increasing current account surplus, but the Bank of Korea is unlikely to cut rates further this year, especially given rising inflation. Further expansion in fiscal spending is also unlikely ahead of the December presidential election.
That means there aren’t many options left for the country’s policy makers to sustain growth in the coming months, except hoping for a continued global economic recovery.