South Korea economic comment

Transcription

1 October South Korea economic comment Key trends Optimism about the economy is growing, following a stronger-than-expected result in the June quarter national accounts and a raft of monthly data since then pointing to continued strong growth going forward. In light of recent data, we have raised our GDP forecast to % this year, from a previous ½%, and we expect growth to remain at around this level in. Real GDP Growth (%) The BOK has been raising interest rates in an effort to curb ballooning money supply growth and inflationary pressures this year. After raising its rates by bps twice in a row in July and August to a six-year high of %, the BOK left is benchmark call rate target unchanged in September and October as it weighed lingering concerns about the US housing market against steady domestic economic fundamentals f BOK Overnight Call Rate Target & US Fed Funds We now think that the BOK will find it increasingly difficult to raise interest rates again this year as global financial market uncertainty weighs on the economy. We expect interest rates to remain on hold in the near-term as the BOK maintains its pro-growth stance. Despite the persistence of inflation risks in the economy, the appreciation of the Won should allow the monetary authorities some leeway in leaving rates low. Oct- Oct- Oct- Oct- Oct- Oct- Oct- Oct- BOK Overnight Call Target Rate US Fed Funds Target Rate Tom Taylor Robert De Iure Head of Economics - International Economist Country Risk () () Tom_Taylor@national.com.au Robert_De_Iure@national.com.au

2 South Korea economic comment October Growth momentum picks up Optimism about the economy is growing, following a stronger-than-expected result in the June quarter national accounts (% yoy, up from % yoy in Q ) and a raft of monthly data since then pointing to continued strong growth going forward. Robust and balanced performances in domestic consumption and exports have prompted upward revisions to growth forecasts for this year and next, led by Chart : Exports & Imports (mma, % yoy) - - the BOK which believes that full year growth may now surpass its.% target and come in at between.-%. In light of recent data we have also raised our GDP forecast to % this year, from a previous ½%, and we expect growth to remain at around this level in Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Exports Imports Notwithstanding the risks associated with a potentially Chart : Real GDP Growth (%) % % % % -% -% Q'9 Q'9 Q'9 Q'9 Q'99 Q' Q' Q' Q' Q' Q' Q' annual average year-on-year % % % % -% -% faster slow down in the US economy, one area of concern is the renewed strength of the Won, which recently touched a -year high against the US$, buoyed by the strength of domestic economic data and interest rate cuts in the US. The Won has also strengthened against the Japanese Yen, giving rise to fears about its impact on Korea s export competitiveness as Japan is a key competitor in many export markets. Although the BOK s monthly survey of business sentiment for manufacturers indicated that confidence remained buoyant in October, concerns were expressed about the exchange rate. Chart : Exchange Rates Economic growth in South Korea is being underpinned by strong export growth, which despite a slow down in US demand for Korean goods, is being offset by resiliant sales in China and the European Union (China now accounts for around % of total exports). The monthly trade data shows that exports fell by.% yoy in September, but this largely reflected the fact that the Chuseok fall harvest holiday period cut into the number of working days. In -month trend terms, exports were up by almost % over the same,,,,,,,, 9 9 period a year earlier, underpinned by productivity gains and strong external demand for key goods such as steel, autos, ships and semiconductors. 9 Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- Won per US$ (LHS) Won per Japanese Yen (RHS)

3 South Korea economic comment October Industrial output exceeded expectations in August, rising by.% yoy, or by % yoy in -month trend terms. Output growth was boosted by healthy increases in the output of autos, semiconductors and machinery goods. In addition to confirming the strength of external demand, August s industrial output data reinforced the recovery taking place among private consumers. Chart : Industrial Production (% yoy) The IMF recently noted that the nascent consumption recovery in Korea remains vulnerable to a down turn in asset markets, a hard landing in the US or the possibility of further hikes in oil prices. However, Korean consumers appear to have taken little account of the global financial turbulence, with the BOK s consumer sentiment index rising to a five year high in the September quarter. This was complemented by the NSO consumer expectations index, which also rose further in September, indicating that consumers have greater confidence in the economy and may spend more in the coming months. Consumers are clearly benefiting from stable and relatively low rates of unemployment and improved household debt positions. Chart : Consumer Sentiment Indices BOK Consumer Sentiment Index Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- - year-on-year -month moving average A breakdown of the industrial report showed that export 9 9 shipments were up by a one-year high of % yoy in -month trend terms in August, while domestic shipments grew by almost %yoy, up from around % yoy earlier this year. NSO Consumer Expectation Index Sep-99 Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Chart : Producers Shipments (mma, % yoy) Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- Export Shipments Domestic Shipments Interest rate dilemma The BOK has been raising interest rates in an effort to curb ballooning money supply growth and inflationary pressures this year. However, after raising its key interest rate by basis points twice in a row in July and August to a six-year high of %, the BOK left is benchmark call rate target unchanged in September and October as it weighed lingering concerns about the US housing market against steady domestic economic fundamentals. We think that the BOK will now find it increasingly difficult to raise interest rates again this year as global financial market uncertainty weighs on the economy.

4 South Korea economic comment October Previously, the BOK had expressed concerns about the potential emergence of a real estate bubble in the economy as a key factor behind the latest tightening cycle. However, the real estate market looks to be stabilising to an extent owing to concerted efforts by the central bank and the government to crack down on speculation. Indeed, the growth in housing prices eased to 9.% yoy in September, down from 9.% yoy in August. Chart : Aggregate Liquidity & Bank Lending (% yoy) Chart : National House Prices (% yoy) Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Aggregate Liquidity Bank Lending However, consumer prices continue rising, with the CPI inflation rate rising to.% yoy in September. Moreover, the latest Consensus estimate sees inflation rising to.% next year. This is still within the BOK s target range of.-.% for -9, but upside risk is significant Sep-9 Sep-9 Sep-99 Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Chart 9: Consumer Prices (% yoy) National Seoul However, liquidity levels in the financial system have shown no visible signs of abating so far. At the end of August, the liquidity aggregate was up.% yoy and growing at levels not seen since early-. Bank lending to corporates and households was also running at around % yoy, its fastest pace of growth in more than four years. The BOK governor has recently acknowledged that the bank is not satisfied with the current level of liquidity, but its ability to raise rates in the short-term is likely to be strongly influenced by interest rate developments in the US. At.%, policy rates in the US are now below Korean rates for the first time in over two years, making Korean assets (especially bonds) more attractive to overseas investors. The BOK is also concerned that further rate hikes could put even more upward pressure on the Won to the detriment of local exporters. Sep- Sep- Sep- Sep- Sep- Sep- Sep- Sep- Clearly, the BOK is in somewhat of a dilemma. On balance, we expect the BOK to keep interest rates on hold in the near-term as it maintains its pro-growth stance. Despite the persistence of inflation risks in the economy, the appreciation of the Won, should allow the monetary authorities some leeway in leaving rates low at least for now.

5 Macroeconomic, Industry & Markets Research Australia Alan Oster Group Chief Economist +( ) Jacqui Brand Personal Assistant +( ) 9 Jeff Oughton Head of Economics Australia & Industry +( ) 9 James McKinlay Economist Australia +( ) Dean Pearson Senior Economist Industry & Commodities +( ) Gerard Burg Economist Minerals & Energy +( ) 9 John Sharma Economist Property, Business Services, TMTs +( ) Ian Gordon Economist Transport, Healthcare, Retailing +( ) Anthony Tooman Economist Manufacturing +( ) Skye Dixon Economist Agribusiness +( ) Tom Taylor Head of Economist International +( ) Robert De Iure Economist Country Risk +( ) Carolyn Fraser Economist International +( ) 9 Simon Calder Economist International +( ) Robert Henderson Chief Economist Markets Australia +( ) 9 David de Garis Senior Economist Markets +( ) 9 Spiros Papadopoulos Senior Economist Markets +( ) 9 New Zealand Tony Alexander Chief Economist BNZ +( ) Stephen Toplis Head of BNZ Market Economist +( ) 9 Craig Ebert Senior Economist, Markets +( ) 99 Mark Walton Market Economist +( ) 9 London Tom Vosa Head of Market Economics UK +( ) DISCLAIMER: [While care has been taken in preparing this material,] National Australia Bank Limited (ABN 9) does not warrant or represent that the information, recommendations, opinions or conclusions contained in this document ( Information ) are accurate, reliable, complete or current. 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