Analysts say economy slowed in 4th quarter

Korea’s economy is forecast to have slowed in the final quarter of 2013, though rising exports on the back of improving activity in developed economies are expected to solidify a recovery this year.

The Bank of Korea will announce the nation’s economic growth in the fourth quarter today.

Government stimulus provided crucial support to Asia’s fourth-largest economy last year, but with spending set to ease off private consumption will need to pick up the slack to foster sustainable growth, analysts say.

Seasonally adjusted gross domestic product in the fourth quarter is seen rising 0.9 percent from the third quarter, a median forecast in a survey of 15 analysts showed.

This is below the 1.1 percent growth logged in the June-September quarter, mainly due to reduced government spending in the final quarter.

On an annual basis, 18 analysts estimated Korea’s economy expanded by a median 4 percent in the fourth quarter - the quickest pace of growth since an annual 4.3 percent rise in the first quarter of 2011.

This underlying strength in activity is seen cementing a fairly bullish outlook for the rest of this year.

Both analysts and policy makers see growth momentum picking up over the year as the trade-reliant economy gets a helping hand from improving exports and a more sure-footed recovery in developed nations.

“We’re bullish on South Korea over the coming year. Its exports are highly geared into the United States upswing, and we expect this to underpin 2014 GDP growth of around 4 percent,” BNP Paribas economist Mark Walton said in a note to clients.

Korea, home to global manufacturing giants such as Samsung Electronics and Hyundai Motor, saw exports grow 2.1 percent last year.

The government expects overseas shipments growth to accelerate to 6.4 percent this year.

The International Monetary Fund raised its global growth forecast for the first time in nearly two years on Tuesday, saying fading economic headwinds should permit advanced nations to pick up the mantle of growth from emerging markets.

The Bank of Korea and the finance ministry expect this year’s growth to come in just short of 4 percent from a projected 2.8 percent expansion in 2013.

The rosy outlook is partly predicated on private consumption doing more of the heavy lifting, especially as government spending is forecast to grow at a slower rate of 2 percent this
year from a 7-plus percent rise in 2013.

The central bank expects private consumption to grow by 3.4 percent this year, accelerating from a projected 1.9 percent rise in 2013 due to continued jobs growth and subdued price
pressures.

Still, the ride ahead for Korea’s economy may not be entirely smooth, mainly because consumers remain reluctant to open their wallets because of the burden of a record high level of household debt.

The ratio of local household gross debt to gross disposable income was at 153.4 in 2012, well above the Organisation for Economic Cooperation and Development average of 121.3.

While the Bank of Korea’s consumer sentiment index stood at the highest level since early 2011, preliminary sales data at the country’s top department and discount store chains weakened in December from a month earlier.

Analysts say the central bank may be more inclined to keep interest rates low for longer to help drive consumption.

“Households are likely to remain cautious, given their high levels of debt, but the low interest rates will at least provide them with some breathing room,” said Gareth Leather, an economist at Capital Economics.

The Bank of Korea kept the benchmark policy rate unchanged at 2.5 percent for the eighth straight meeting earlier this month, and market consensus suggests interest rates will only start rising towards the end of the year.

The turn in U.S. monetary policy could also hamper consumer spending, analyst say, as the Federal Reserve’s unwinding of its bond-buying stimulus could push up interest rates.

The government is expected to announce additional measures during the current quarter to keep a lid on household debt, which will involve pushing borrowers towards more structurally sound fixed-rates or amortizing loans.

“Household debt is a burden that the Korean economy will need to bear for a while,” said Taurus Investment economist Kim Jong-su. “You’re just not going to see the kind of surge in income or a dramatic jump in social welfare spending that would suddenly allow households to pay off all their debt.”

Reuters