South Korea’s imports fell nearly 6 per cent in July, the central bank said on Wednesday, highlighting flagging domestic demand that reflects the economic headwinds facing the region.
As the country’s export-oriented economy has been hurt by weakening conditions in the key markets of China, Europe and the US, ailing confidence has sapped demand at home from both consumers and businesses.
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This resulted in imports slipping to $41.3bn in July: down from $43.8bn a year earlier. A smaller decline in exports — 4 per cent, to $46.6bn — coupled with changes in the balance of services payments and other areas of income, resulted in South Korea’s current account surplus growing 62 per cent to $6.1bn.
Economists said that the widening surplus was not a sign of health for the country’s economy. “There is a negative relationship between South Korea’s current account balance and economic growth,” said Kwon Young-sun at Nomura, adding that the large surplus underscored the extent to which manufacturers were cutting back on production and investment.
Business confidence fell to a four-year low in July, according to the Bank of Korea. Ronald Man, an economist at HSBC, said it was reasonable to expect the coming months to bring further falls in South Korean exports, which declined in five of the first seven months of the year. This reflected pressure on exports across Asia, with possible monetary easing by the People’s Bank of China providing the best hope of a reversal in the trend, he added.
The impact of business nervousness has been compounded by a similar stance among consumers, who are also burdened with one of the world’s highest rates of household debt. Private consumption grew only 1.4 per cent in the first half of the year.
The undermining of domestic demand by external pressures has highlighted the difficulty inherent in the government’s goal, stressed by officials, of developing an economy less reliant on exports. Meanwhile, it will strengthen economists’ conviction that the Bank of Korea will lower the base interest rate in the next two months, following a widely unexpected 25 basis point cut in July.
A second cut of that size would bring the base rate down to 2.75 per cent, its lowest level since March last year. The Bank of Korea’s increasingly dovish stance reflects its concern about the deteriorating economic outlook. Soon after last month’s interest rate cut, it reduced its full-year growth forecast for the year from 3.5 per cent to 3 per cent.
Some economists had argued that the government should consider fiscal stimulus to boost the economy, following its announcement in June of an Won8.5tn ($7.35bn) package that critics argued consisted largely of existing commitments. However, senior government sources say that it will resist such calls, in order to preserve fiscal ammunition in case of a more serious economic deterioration.