S.Korea’s inflation at record low, economic growth downgraded - GulfToday

S.Korea’s inflation at record low, economic growth downgraded


People walk past sale signs at a shopping district in Seoul. Associated Press

South Korea’s consumer inflation faltered to its slowest on record in August while second quarter economic growth was revised down on weaker exports, firming up the case for central bank rate cuts as early as next month.

While policymakers were swift to talk down the risks of deflation, heightened expectations of more central bank easing pushed bond prices higher.

The consumer price index was unchanged in August from a year earlier, Statistics Korea data showed, missing the 0.2% rise tipped in a Reuters survey and marking the weakest pace since the country began releasing inflation data in 1965.

Weighing on inflation were weaker consumer demand and declining farm prices as improved weather helped boosted production.

Separately, the Bank of Korea (BOK) revised down economic growth for the June quarter to 1.0% on-quarter from a 1.1% gain reported earlier, citing weaker exports than estimated earlier.

The weak data dominated discussion at a rare joint meeting between the BOK and finance ministry.

“The BOK shares the same opinion with the finance ministry that we are not in a situation to worry about deflation,” BOK Senior Deputy Governor Yoon Myun-shik said at the meeting, adding inflation would pick up soon.

Despite this assurance, treasury bond prices rose broadly with the benchmark 10-year yield shedding 1.5 basis points to 1.285% as of 0228 GMT, far below the central bank’s policy rate of 1.50%.

“I don’t think the inflation would sharply pick up in the short-run as the BOK predicts,” Kim Yu-mi, economist at Kiwoom Securities said, adding deflation remains a real prospect.

Farm products prices plunged 11.4% year-on-year as weather improved while core inflation excluding volatile food and energy prices was 0.8%.

South Korea’s inflation has been extremely weak by historical standards and a long way off the central bank’s 2%target as consumers and companies tighten their spending.

Economists expect South Korea’s economic growth to tumble to as low as 1.4% this year from 2.7% last year, marking one of the worst years in five decades.

Tuesday’s figures follow grim trade data for August, which showed the exports tumbled for a ninth consecutive month.

Last week, the BOK held benchmark rates steady at 1.50% but kept the door open for what would be the second rate cut this year after July’s surprise cut, the first in three years.

The government last week drafted the most aggressive budget plan since the global financial crisis to fend off growing domestic and external economic risks.

South Korea’s exports tumbled in August for a ninth consecutive month, on sluggish demand from its biggest buyer, China, and depressed prices of computer chips globally, government data showed on Sunday.

The bleak data clouded the outlook for Asia’s fourth-largest economy as a brewing trade dispute with Japan emerged as a new risk to the export-dependent economy on top of the prolonged conflicts between the United States and China.

Exports in August plunged 13.6% from a year earlier, the trade ministry data showed, exactly matching a median 13.6% fall forecast in a Reuters survey and marking the third month with a double-digit rate of drop in exports.

That further dented growth prospects for South Korea and strengthened the case for an additional policy easing by the central bank, soon after a surprise interest rate cut in July, for the first time in three years.

“There’s no sign of the export momentum gaining strength as the US-China trade dispute continued while Japan’s export curbs and the political unrest in Hong Kong have shaken business sentiment,” said Lee Sang-jae, an economist at Eugene Investment and Securities.

South Korea is the first major exporting economy to report foreign trade data each month and its companies include some of the world’s top suppliers of chips, smartphones, cars and ships, so providing an early guide to the health of the global economy.

On Sunday, the finance minister also said South Korea was now likely to miss this year’s growth target, just two months after the government downgraded the goal to 2.4-2.5% from 2.6-2.7% earlier.

The sluggish exports in August were led by a 30.7% drop in shipments of semiconductor chips that account for a fifth of the total, while a decline of 21.3% in sales to neighbouring China also contributed, the ministry data showed.

The ministry said in a statement exports, excluding semiconductors, contracted 8.7% year-on-year.

Disputes with Japan were hardly a welcome development, although the effect has been negligible.


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