Growth May Slow in S. Korea, Taiwan on Exports

Growth in South Korea and Taiwan likely slowed in the second quarter as the debt crisis in Europe and faltering U.S. growth weighed on Asia’s exports.

South Korea’s gross domestic product grew 3.5 percent from a year earlier, less than the 4.2 percent gain in the previous quarter, according to the median estimate in a Bloomberg News survey of 11 economists. Taiwan’s growth likely slowed to 4.5 percent from 6.55 percent, a separate survey showed.

The forecast moderations in growth may fail to discourage policy makers from raising interest rates during the second half to restrain price gains. Bank of Korea Deputy Governor Kim Jae Chun said yesterday that the central bank’s biggest concern is that inflation will become a “chronic problem.”

“Even though growth is slowing a little, inflation shows no sign of cooling both in Korea and Taiwan,” said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore. “The policy trade-off is getting more challenging and they are facing some risks due to the U.S. and Europe.”

South Korea will release its preliminary GDP data at 8 a.m. Seoul time on July 27 while Taiwan’s report will come out at 4 p.m. local time on July 29.

Disruptions from Japan’s earthquake in March have also trimmed Asia’s exports. Shipments from South Korea expanded 14 percent in June, the smallest gain since October 2009. Taiwan’s export orders, an indication of shipments in the next one to three months, gained the least in four months in June.

‘Pretty Strong’

The Bank of Korea’s Kim indicated that he was not concerned about the outlook, describing exports as still “pretty strong” and adding that the nation’s economic growth would accelerate on a year-on-year basis in the second half.
“A possible economic slowdown is not in our list of policy concerns,” Kim, 57, said in an interview in Seoul.

Second-quarter profit at Samsung Electronics Co., the world’s largest maker of televisions, dropped 26 percent on a slump in flat screen sales. Hynix Semiconductor Inc., the number-two maker of computer-memory chips, reported a 34 percent profit declined on falling chip prices.

Taiwan Semiconductor Manufacturing Co., the world’s largest maker of chips designed by other companies, reported slower quarterly profit growth for the January-March period.

Stronger Currencies

A strengthening in the two economies’ currencies may also crimp trade gains. South Korea’s won has risen about 6 percent against the dollar this year, with the Taiwan dollar climbing 5 percent.

“We think the central banks in Asia are still under pressure to raise interest rates, barring any unforeseen shocks in the global economy and global financial markets,” said Ma Tieying, an economist with DBS Bank Ltd. in Singapore. “The current rate level in the majority of economies in the region remains significantly below neutral.”

Ma predicts both South Korea and Taiwan will raise interest rates by half a percentage point more this year.

The Bank of Korea increased its benchmark seven-day repurchase rate to 3.25 percent from 3 percent in June. Taiwan’s monetary authority, which sets rates once every three months, raised borrowing costs by 0.125 percentage point for the fifth straight quarter on June 30, to 1.875 percent.

“The central banks will keep raising interest rates, for inflation in Korea and for financial stability in Taiwan,” said Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Group Plc. “Both Korea and Taiwan will grow faster for the rest of this year after some slowdown in the second quarter.”

Pork Prices

South Korea’s inflation has exceeded the central bank’s target limit of 4 percent every month this year. Pork prices surged 46 percent in June from a year earlier, prompting school cafeterias to serve beef or chicken instead.

President Lee Myung Bak held an emergency cabinet meeting on July 20 to discuss ways to contain inflation. South Koreans’ unhappiness about climbing costs has spurred a drop in his approval rating to 32.8 percent this month compared with 76 percent when he came to power in February 2008, according to a poll by Seoul-based Realmeter.

If the government fails to meet its 4 percent inflation target this year, that “would be highly burdensome politically given the political backdrop ahead of parliamentary elections in April 2012 and the adverse impact of inflation on the living standards of the middle class,” said Kwon Goohoon, an economist at Goldman Sachs Group Inc. in Seoul.

In Taiwan, inflation quickened to a 16-month high of 1.93 percent last month and home prices rebounded to a record in May.

Taiwan’s labor council said last week it plans to increase its minimum wage for the second straight year in January as accelerating inflation and record home prices threaten to widen the income gap.

President Ma Ying-Jeou, striving for re-election in January, is running neck-and-neck with opposition leader Tsai Ing-wen. Ma would get 37.3 percent of votes to Tsai’s 37.2 percent, according to a poll by the Taipei-based Global Views Survey Research Center published July 21.(Bloomberg)