South Korea’s Inflation Moderates to Lowest in 21 Months

South Korea’s exports declined for a second month in April and inflation cooled, adding pressure on the central bank to hold interest rates next week.

Overseas shipments fell 4.7 percent from a year earlier, after a 1.4 percent decline in March, the Ministry of Knowledge Economy said in a statement today. The median estimate in a Bloomberg News survey of 13 economists was for a 1.1 percent drop. A separate report today showed that inflation moderated to a 21-month low last month.

Central banks across most of Asia are keeping rates steady as they juggle the need to damp inflationary pressures with bolstering growth as Europe’s debt crisis and a slowdown in China weigh on the global economic outlook. The Bank of Korea kept borrowing costs unchanged for a 10th month in April while cutting its growth forecast for this year.

“Exports this year may fall short of the $595 billion that we projected in January,” Han Jin Hyun, deputy trade minister, told reporters in Gwacheon today. “China is slowing at a pace faster than expected, which is the biggest concern. Europe is also a major drag.”

The won strengthened 0.4 percent to close at 1,130.13 per U.S. dollar yesterday, according to data compiled by Bloomberg. The benchmark Kospi stock index rose 0.3 percent. Markets in South Korea are closed today for a holiday.

Election Effect

The Ministry of Knowledge Economy attributed the decline in overseas shipments last month to fewer working days due to a parliamentary election, unusually strong exports a year ago, and some petrochemical plants being idled for repairs.

“The delayed resolution of the European debt crisis, slowing Chinese economy, yen weakness and elevated oil prices add to external uncertainty, which may damp export growth and the trade surplus,” the ministry said in a statement today.

An index measuring manufacturers’ confidence rose to a nine-month high for May and the consumer sentiment index climbed to a near one-year high on signs of economic recovery, according to central bank surveys.

“We expect stronger momentum in the second quarter, supported by a resurgent tech cycle that will boost production and exports,” Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore, said before the releases. “Underlying price pressures remain, and may become more acute in the second half amid stronger growth and consumer confidence.”

Output Growth Slows

Output rose at a slower pace in March as the European debt crisis damped exports and domestic demand weakened.

South Korea’s economy expanded at the fastest pace in a year last quarter, boosted by government spending and investments by semiconductor chipmakers. Still, the BOK reduced its economic growth forecast for this year to 3.5 percent from 3.7 percent on April 16, citing downside risks from the European debt crisis and high oil prices.

South Korea should raise rates once economic uncertainty ebbs and allow the won to appreciate to counter inflationary pressures, the Organization for Economic Cooperation and Development said on April 26. The Paris-based organization projected Asia’s fourth-largest economy will expand 3.5 percent this year and about 4.3 percent in 2013.

Exports fell to $46.3 billion in April from a revised $47.4 billion in March, today’s report showed. Imports declined to $44.1 billion. The trade surplus was $2.2 billion.

Shipments to the European Union fell 16.7 percent from a year earlier in the first 20 days of April, the ministry said. Exports to China, the biggest buyer of South Korean goods, increased 1.7 percent, while sales to the U.S. rose 5.6 percent. Data for exports to individual countries are only available for the first 20 days of the month.

Exports of semiconductors fell 8.3 percent last month while car shipments gained 13.6 percent, the ministry said.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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