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South Korea set for one of worst growth periods in half a century

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Via Financial Times

The South Korean economy is on track for one of its worst two-year growth periods in more than half a century, battered by China’s economic slowdown, uncertainties over the trade war between Beijing and Washington and a downturn in the computer chip market.

The export-driven economy, seen as a bellwether for the region’s technology supply chain, is expected to deliver growth of 2 per cent in 2019, a fall from the 2.6 per cent forecast at the beginning of the year, South Korea’s central bank said on Friday. That would mark its lowest level since the global financial crisis a decade ago.

The fate of Asia’s fourth-largest economy is closely tied to global electronics demand and China, with exports representing 45 per cent of the country’s GDP and China accounting for a quarter of the country’s outbound shipments.

The Bank of Korea trimmed its growth outlook for 2020 to 2.3 per cent from its 2.5 per cent forecast in July, even as it said months of declines in exports and investments in new factories would end next year.

According to central bank records dating back to 1954, there has been no consecutive two-year period with growth lower than 2.5 per cent. During the global financial crisis, GDP growth slipped from 2.8 per cent in 2008 to 0.7 per cent in 2009 before recovering to 6.5 per cent the following year.

“The revision is the outcome of the economic performance in the third quarter that fell short of expectations, and a delay in the recovery of the global semiconductor industry,” Lee Ju-yeol, Bank of Korea governor, told reporters after announcing its third downward revision this year.

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Seoul is rolling out its biggest fiscal stimulus programme since the global financial crisis, with Moon Jae-in, the country’s president, describing conditions as a “grave” economic situation.

Analysts and companies have struck a cautiously upbeat tone in recent months, spurred by signs that a cyclical downturn for the memory chip market had bottomed out and hopes that Washington and Beijing could complete a “phase one” deal to pause their trade war.

The central bank held rates at a record low of 1.25 per cent on Friday. It said it wanted to see the impact of its two earlier rate cuts this year and monitor developments in the US-China trade negotiations before making any further change to monetary policy.

However, it also warned that global economic growth and financial markets were likely to be affected by “the spread of trade protectionism”.

Some economists are wary that continued trade uncertainty will weigh on Asian currencies, including the Korean won, which is down nearly 6 per cent this year

“Our expectations for a re-escalation in US-China trade tensions in 2020 despite recent optimism surrounding a ‘phase-one’ deal, given that structural disagreements between both parties remain, does not bode well for the outlook of Asian currencies,” analysts from Fitch Group said in a research note this week.

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