South Korean exports disappoint as world cools

SEOUL (Reuters): South Korean exports grew by the slowest annual pace in two years in October and the manufacturing sector shrank for a third consecutive month, providing evidence of a cooling global economy and raising fears that a slump is inevitable.

Data also showed consumer inflation slowed more than expected because of lower prices of farm products, reinforcing fading chances of an additional interest rate increase.

Analysts said the South Korean central bank would not consider cutting interest rates unless the global economy slipped back into a 2008-style recession.

“You could say the (Bank of Korea) is done with its so-called interest rate normalisation drive, and I expect the next direction for the rate to be down,” said Yoon Yeo-sam, a fixed-income analyst at Daewoo Securities.

Economic data on Tuesday boosted bond futures further as investors priced out a rate rise. The won fell against the dollar.

Annual overseas shipments by the world’s seventh-largest exporter grew 9.3 percent in October, the slowest pace since October 2009 and far below the median forecast for a 12.6 percent gain in a Reuters poll.

Breakdown figures available for the period Oct 1-20 show exports to the debt-laden European Union tumbled 20 percent from the comparable period last year and shipments to the United States slid 7 percent.

A survey by Markit Economics showed South Korean manufacturing sector activity shrank in October for a third consecutive month as export orders fell, the longest losing streak since the 2008-2009 global crisis.

“The relative weakness of the won has contributed to South Korea’s export growth and the outlook is still relatively optimistic compared to other countries,” said Lee Chul-Hee, Chief Economist, Tong Yang Securities.

Deputy Economy Minister Han Jin-hyun also played down the sharp decline in exports to the European Union in October, blaming fewer deliveries of completed ships or vessels than a year earlier.

Export figures of completed ships reflect a decline in new vessel orders placed during the 2008-2009 global crisis. It takes two to three years for a ship to be built in South Korea, the world’s largest ship builder.

South Korean companies have invested heavily in research, development and design, contributing a large chunk to the world’s cars, ships and electronics via memory chips and other digital products.

The won has weakened by nearly 40 percent over the past five years versus the yen , 21 percent against the euro and 15 percent versus the dollar, Inflation-adjusted data from the Thomson Reuters Datastream shows.

Consumer inflation in October slowed more than expected to a 10-month low of 3.9 percent from 4.3 percent in September, coming below the 4 percent ceiling of the central bank’s target band for the first time this year.

South Korea’s year-on-year consumer inflation averaged 4.4 percent for the first 10 months of this year, making it almost impossible for the country to achieve the 4.0 percent target set for the whole year.

The central bank has acknowledged the need for more interest rate increases to contain inflation but has said it would wait until concerns about a global economic recession subside and financial markets regain stability.

The Bank of Korea last raised the policy interest rate in June and has since left the base rate unchanged at 3.25 percent, far below the country’s inflation rate. It next reviews the rate on Nov. 11.

The Organisation for Economic Cooperation and Development (OECD) recommended in a report released on Monday that advanced G20 economies including South Korea should keep interest rates on hold or, where possible, reduce them.

Investors have almost abandoned expectations for interest rate hikes since the middle of August, with the spread between forward-starting interest rate derivatives and interbank lending rates three months out clinging near zero.