By Eunkyung Seo - Jan 25, 2011
South Korea’s economic growth slowed as investment declined, increasing the likelihood of the central bank pausing interest-rate increases aimed at damping inflation.
Gross domestic product rose 0.5 percent in the three months through December from the previous quarter, when it advanced 0.7 percent, the Bank of Korea said in Seoul today. The median estimate of 12 economists in a Bloomberg News survey was for a 0.4 percent gain. From a year earlier, GDP increased 4.8 percent.
Investment shrank the most in two years last quarter even as inflation climbed toward the central bank’s 4 percent ceiling. The Bank of Korea next reviews policy on Feb. 11 after joining neighbors Thailand and India in raising borrowing costs this month, acting on the same day the government announced price controls.
“The slowing economy will likely make the central bank more careful about tightening rates,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. The next increase may not be until March or April as the economy will probably cool further during this quarter, he said.
The won was little changed at 1,118.75 per dollar as of 11:31 a.m. in Seoul, while the Kospi share index gained 0.8 percent, according to data compiled by Bloomberg. The won has risen 6.5 percent in the past 6 months, the third-biggest climb in Asia, threatening trade competitiveness in the export-led economy.
Investment Slides
Investment declined 3 percent in the three months through December from the third quarter, while manufacturing output fell 0.7 percent. The economy expanded 6.1 percent for last year as a whole, the fastest pace since 2002.
“The contraction in investment activity is a warning sign, although coming after a string of gains it still leaves the year-on-year growth rate pretty high,” said Dariusz Kowalczyk, a Hong-Kong based economist at Credit Agricole CIB.
Average inflation accelerated to 3.6 percent in the fourth quarter. President Lee Myung Bak declared “war” on consumer price growth this month, saying it must be contained at 3 percent to protect families on low incomes.
Consumer confidence in January declined for a second straight month while the expected inflation rate over the next year rose to an 18-month high of 3.7 percent, the central bank said in a separate report.
The economy probably won’t slow “quickly” in coming months, Jung Yung Taek, head of the national income team at the Bank of Korea, told reporters in Seoul today.
Rate Increases
Governor Kim Choong Soo and the policy board raised borrowing costs by a quarter of a percentage point to 2.75 percent on Jan. 13, following increases of the same amount from a record low in July and November.
The government announced plans the same day to reduce import tariffs on some food items and freeze the cost of utilities, including electricity and gas. The administration also said it will ask steelmakers to refrain from raising prices.
The central bank’s base rate has remained below inflation for a record 14 straight months, threatening to skew incentives in favor of spending rather than saving.
Some regional counterparts have moved rates up more aggressively to battle rising energy and food prices, with India boosting its benchmark to a two-year high yesterday and signaling further increases.
Foreign Capital
“The economy is slowing, but not at a rate that should be of concern,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “The central bank may want to raise interest rates again in February as inflation pressures are still growing despite this month’s surprise move.”
Higher rates may drive up the won by attracting more foreign capital seeking better yields. South Korea has joined emerging markets from Brazil to Turkey in striving to counter the inflows after reviving taxes on overseas investors in domestic government bonds and tightening scrutiny of trading in foreign-currency derivatives.
Overseas shipments boosted growth last year, with exports rising for a 14th consecutive month in December in an economy where they are equivalent to about half of GDP. Global demand helped earnings in 2010 at companies including Samsung Electronics Co., Asia’s biggest maker of semiconductors, flat screens and mobile phones.
The recovery in the U.S. economy may lead the central bank to increase its forecast for South Korean expansion this year from the current estimate of 4.5 percent, Kim said on Jan. 19.
Growth in the Chinese economy, South Korea’s biggest export market, accelerated to 9.8 percent in the fourth quarter, increasing concern that China’s policy makers will raise interest rates again to curb inflation and stem the expansion.
Today’s report signals “less urgency” to curb domestic demand with higher rates, though an increase of half a percentage point over the rest of 2011 is likely as the Bank of Korea seems focused on inflation, Credit Agricole’s Kowalczyk said.
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
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