December 3, 2013 5:54 am

South Korean economy seeks room to breathe

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A factory employee on an engine assembly line for a car company©Getty

From its plant in the industrial town of Ansan, Hanshin Machinery has a clear window on South Korean manufacturing confidence: the more factories expand, the more they buy its air compressors.

Business has been subdued this year, says Kwon Kyung-hwa, one of Hanshin’s strategic planners, in line with the weak manufacturing sentiment that has dented fixed asset investment in South Korea. “But we hope that things will get better next year,” she adds. “The economy is expected to recover.”

Ms Kwon’s forecast of better conditions next year matches that of South Korean authorities and most economists, who are predicting that stronger global growth will boost the country’s export-dependent economy.

But that upbeat prognosis has failed to instil confidence in South Korean manufacturers, who have held back from capacity expansion due to doubts about the economic outlook – concerns that will be reinforced by the subdued nature of recent data.

Trade data for November, published on Sunday, showed a year-on-year rise in exports of just 0.2 per cent, massively undershooting economists’ consensus prediction of 3 per cent.

November’s figures showed the knock-on effects for South Korea of recent economic turbulence in southeast Asia, with exports to the Asean countries – which together make up South Korea’s biggest export market after China – declining 11.2 per cent year-on-year.

This outweighed a 2.7 per cent increase in sales to the US, while exports to China rose 3.7 per cent – weak by the standards of recent years – in a reflection of that country’s slowing growth.

Exports account for more than half of gross domestic product, and the latest downbeat data came on the heels of a Bank of Korea survey showing a sharp decline in manufacturing sentiment in November.

“Confidence has been fragile for most of the year – companies haven’t had the confidence to invest, or even keep inventories at a high level,” says Wai Ho Leong, an economist at Barclays.

Investment in machinery and transport equipment is likely to record a second successive annual decline after heavy falls in the first two quarters of the year. But in the third quarter it rose for the first time in 18 months – albeit only 1.8 per cent, which was flattered by low comparisons.

Yet Sunday’s disappointing trade data contained one encouraging sign for investment: imports of capital goods rose 10.6 per cent year-on-year.

Higher fixed asset investment – along with rising consumer spending and a rebound in the property market – could help spur a rebound in the South Korean economy next year, Mr Leong says.

Growth is recovering. But the pace of the recovery will likely remain gradual

- Ronald Man, economist at HSBC

In part, this will be sparked by improved confidence in global trade prospects. There may also be an element of unleashing demand after the restraint on investment has left companies sitting on cash.

“Even though companies have had plans to invest, they have kept on delaying them because the outlook was pretty uncertain,” says Stephen Lee, an economist at Samsung Securities, adding that domestic investment could also be “crowded out” by a long-term trend towards overseas production by South Korean manufacturers.

Many companies are likely to hold off on large-scale capacity expansion until the safe passage of government measures to boost investment. Three rounds of such policies announced under the government of President Park Geun-hye, who took office in February, have included a heavy emphasis on efforts to stimulate growth in industrial sectors.

Several of those measures remain bogged down in a parliamentary impasse, however, and on Monday the government missed the declared deadline to pass next year’s budget. That raises the possibility of its having to suspend billions of dollars in planned spending, creating a further drain for the economy.

“Growth is recovering,” says Ronald Man, an economist at HSBC. “But the pace of the recovery will likely remain gradual.”

Additional reporting by Song Jung-a in Seoul

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