Alarm bells sound for global economy as bellwether South Korea reveals struggles


While China’s stabilising economy has been expected to lift the rest of Asia, and the world, the problems faced by Korea suggest that the hurdles to a quick rebound remain high. Meanwhile, the BOJ’s struggle to spur prices is a worrying sign for some of its global peers, who are struggling with their own stubbornly low inflation and face talk of ‘Japanification.’

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Exports account for about half of Korean GDP and are on course for a fifth-straight monthly decline. Slowing sales to China — Korea’s biggest market — and soft demand for semiconductors are biting, hurting corporate giants like Samsung  and SK Hynix.

The Bank of Korea last week reduced its 2019 growth forecast to 2.5 per cent while the government has announced a supplementary spending package of 6.7 trillion won ($8.2 billion), which it says may push up GDP by 0.1 per cent age point and create at least 73,000 new jobs.

For now, there are few signs of a major uptick in global exports. The International Monetary Fund cut its forecast for global expansion to the slowest pace since the financial crisis a decade ago. In Europe, recent signals have been mixed, with manufacturing remaining the big drag on economy. US gross domestic product due Friday is expected to show the economy expanded by 2.2 per cent .

More pain for tech industry

While policy makers in Seoul are hoping the tech cycle will bottom, Korea’s reliance on memory chips is backfiring. Hynix, a supplier to Apple Inc., posted its worst drop in operating profit since 2012 on Thursday as memory-chip prices continue their free fall amid weakening demand from smartphone makers and data centers. Earlier in April, Samsung Electronics reported its worst operating-profit drop in more than four years.

Earlier this month, Samsung Electronics reported its worst operating-profit drop in more than four years.Credit:AP

The worse-than-expected GDP data, coupled with inflation that’s well below its 2 per cent target, ought to encourage the Bank of Korea to respond with lower interest rates, said Rob Carnell, Asia-Pacific head of research and chief economist at ING Bank in Singapore. The benchmark rate has been unchanged at 1.75 per cent since November last year.

From a year earlier, the Korean economy expanded 1.8 per cent , compared with projections of 2.4 per cent . Facilities investment fell 11 per cent in the first quarter from the previous three months, the biggest drop in 21 years. Construction investment declined 0.1 per cent from the earlier period, when it gained 1.2 per cent .

GDP export volumes fell 2.6 per cent from the previous three months, import volumes fell 3.3 per cent , government spending rose 0.3 per cent , and private spending gained 0.1 per cent .

Finance Minister Hong Nam-ki said the economy would improve in the second quarter, and that the second half of the year would be better than the first as the government focuses on building up economic momentum.

It’s a view that at least some economists also share.

‘I would not jump to a bearish conclusion before seeing second-quarter numbers,’ said Kathleen Oh, economist at Bank of America Merrill Lynch in Hong Kong.

Bloomberg

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