Economy is stalling, so stimulus is considered

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Economy is stalling, so stimulus is considered

Korea’s economy expanded last quarter at the slowest pace since the global recession, underscoring the case for stimulus by the new government and concern that a weaker yen will curb exports.

Gross domestic product rose 1.5 percent from a year ago, unchanged from January’s initial estimate, the Bank of Korea said yesterday. GDP grew 0.3 percent from the third quarter, the second-lowest rate since 2009, which compares with the original figure of 0.4 percent expansion.

Slower growth in Asia’s fourth-largest economy strengthens the rationale for a supplementary budget that President Park Geun-hye may announce this week. It may also add pressure for an interest-rate cut as early as April, after Finance Minister Hyun Oh-seok said last week that the yen, down 18 percent against the won in the past six months, is “flashing a red light” for Korean exports. “A rate cut in April or within the second quarter would make sense not only because of yesterday’s downward revision, but also because an interest-rate cut then will maximize the effect of stimulus coming soon,” said Sun Yoo at Woori Investment & Securities.

The Finance Ministry is expected to release its revised growth outlook for 2013 later this week. Earlier this month, Bank of Korea Governor Kim Choong-soo and his board held the seven-day repurchase rate at 2.75 percent after a 25 basis-point cut in October.

“The market does not like the fact that the central bank and the government are giving different signals right now,” said Huh Kwan, a fixed-income trader at Korea Investment & Securities.

“More are betting on a cut in April given that economic growth has been emphasized by the new government so much of late.”

The Bank of Korea in January pared its forecast for this year’s economic growth to 2.8 percent from an October estimate of 3.2 percent.

The country’s exports fell 8.6 percent in February from a year earlier. This year’s month had fewer working days because of the Lunar New Year holiday.

Hyun said last week that he would use “all possible measures to speed the economic recovery” and indicated that the government support would be announced this month.

Hyun has vowed to consider the “problem” of a sliding yen as part of his “policy package.” He has indicated that the government’s plans to boost growth may include fiscal and housing-market measures. Interest-rate decisions are part of the government’s policy package.

Ties between Korea and Japan, strained by an island dispute, may further weaken after Bank of Japan Governor Haruhiko Kuroda reaffirmed last week that his country could bring forward open-ended asset purchases, due to begin next year. Japanese visits to Korea fell five straight months to a two-year low in January, according to the Korea Tourism Organization.

Samsung Electronics said in January that currency gains could reduce its operating profit by 3 trillion won ($2.71 billion) this year.

Kia Motors reported a 51 percent slump in operating profit for the fourth quarter and said it expects a “difficult year” with a stronger won.

Kang Myung-hun, former Bank of Korea board member and now a professor at Dankook University, said the nation still lives on exports for growth and a strong won versus a weak yen is definitely hurting. “We may need some action to protect us,” Kang said.

Bloomberg

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