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Covid outbreak buffets South Korean growth

South Korea’s economic growth slowed in the third quarter as strong exports were offset by weak domestic consumption owing to the country’s tough Covid restrictions.

Gross domestic product rose 0.3 per cent in the July-September period compared with the second quarter, missing a 0.6 per cent growth forecast in a Reuters survey. The economy grew at 0.8 per cent in the second quarter.

Exports rose 1.5 per cent in the third quarter from the previous three months while private consumption fell 0.3 per cent. Analysts, however, said the economy would probably regain momentum thanks to the country’s rapid vaccination rollout.

The weaker than expected data for Asia’s fourth-largest economy coincided with economic woes in China and global supply chain bottlenecks.

The Bank of Korea cautioned that China’s energy crunch and the debt crisis in its property market also posed risks for South Korea’s economy. It estimated a one percentage point slowdown in China would reduce the smaller country’s growth rate by 0.1-0.2 percentage points.

The South Korean economy expanded 4.0 per cent compared with the same period last year, slowing sharply from 6.0 per cent growth in the second quarter, which was the fastest in a decade.

Weaker growth in the third quarter was widely expected after the country was hit by its worst Covid-19 outbreak, with daily infections surging above 1,000 cases. But the BoK said that consumption was expected to pick up in the fourth quarter, helped by rising vaccinations and a transition to “living with Covid”.

President Moon Jae-in announced a three-stage plan on Monday for a “gradual return to normal life” by February next year. More than 70 per cent of the country’s 51m population has been fully vaccinated.

Under the plan, virus containment measures will be eased with restaurants and cafés able to open 24-hours a day from next month and up to 10 people allowed to meet for social gatherings.

“While Korea’s recovery lost some momentum last quarter as the virus weighed on growth, the economy should pick up pace again this quarter as high vaccination levels allow the rolling back of containment measures,” said Alex Holmes, Asia economist at Capital Economics. “The BoK is unlikely to be deterred from tightening further by today’s data.”

Lee Ju-yeol, BoK governor, said the central bank would consider another rate rise in November after South Korea in August became the first big Asian economy to tighten monetary policy since the pandemic hit. The central bank is expected to increase its benchmark interest rate by 25 basis points to 1 per cent on November 25 as both inflation and household debt rise.

The central bank has forecast 4 per cent growth this year, underpinned by robust exports. Overseas shipments jumped 36.1 per cent in the first 20 days of October from a year earlier, according to customs data.

“The external environment has also admittedly turned more uncertain amid growing concerns about a sharper slowdown in mainland China, as well as disruptions to global supply chains,” said Krystal Tan, economist at ANZ. “Still, we do not expect a major loss in momentum as the economy continues to open up and fiscal support will remain through 2022.”


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