Domestic economy faces warning signals

9 out of 10 leading indicators point to downturn By Kim Jae-kyoung Despite the government’s upbeat outlook, there are growing signs that the Korean economy will enter a downward path before it sees a full, sustainable recovery, with most key indicators signaling a downturn. The bleak data has ignited debate here over whether it is the beginning of another economic recession or just a passing hiccup on the path to full recovery. According to Statistics Korea, nine out of the 10 leading indicators were negative in October, meaning that Asia’s fourth largest economy is likely to cool off fast in the coming quarters. A week ago, the Bank of Korea (BOK) reported that the nation’s gross domestic product (GDP) grew only 0.7 percent in the third quarter from a quarter ago, the slowest pace in a year and a half. It grew 2.1 percent in the first quarter and 1.4 percent in the second. The economic leading composite index in October reached 128.7, down 0.7 percent from a month ago, the first decrease since April. In particular, nine out of 10 components of the composite index, excluding the KOSPI, shrank in October. In July, only one was in negative territory. The index for construction orders dropped by 29 percent in October from a month ago, while those for machinery orders, imports of capital goods and net barter terms of trade decreased by 6 percent, 0.7 percent and 0.1 percent, respectively. In addition, the index for liquidity at financial firms fell by 0.1 percent, the first month-on-month setback since August in 2008 when the global financial crisis shook the country. Other data is also pointing to a slowdown. Industrial output decreased by 4.2 percent in October, which was the largest drop in 22 months. Manufacturers’ business confidence also fell to the lowest level in 11 months for December. “Economic growth has been slowing since the first quarter, but this mainly resulted from a sharp expansion last year. The pace of growth seems to be slowing but we don’t think that the economy is turning downward,” a Statistics Korea official said. Although the government and the central bank see what’s happening as a passing phenomenon, many are raising concerns that the economy has already peaked and is now beginning to head south again. “We expect industrial output to gain in November month-on-month, but failing to offset the decline in October, given a high inventory burden,” Nomura Securities economist Kwon Young-sun said in a research note. “As a result, we expect the current economic downturn to continue. Indeed, the coincident composite economic index, which measures the current business cycle, fell in October for a third consecutive month, raising the possibility that the cycle may have peaked in July,” he added. The Bank of Korea (BOK) forecast Friday that Korea will see its economic growth slow to 4.5 percent in 2011, but rebound to 4.7 percent in 2012 in line with a recovery of the global economy. It predicted that the economy will expand 6.1 percent this year, the fastest growth in eight years since it grew 7.1 percent in 2002.

kjk@koreatimes.co.kr