South Korea: A Slowdown, but Not a Stall-Out

South Korea's slowdown in recent months is a bump in the road unlikely to trip up one of Asia's fastest-growing economies.

Despite some soft third-quarter data, growth of about 6% this year and 5% to 5.5% next year seems likely, about double the pace of 2001. The pickup reflects strength in both domestic demand and exports, fueled by last year's record-low interest rates and the won's depreciation last year.

Industrial production and sales by retailers and wholesalers are cooling off. However, that's partly the result of labor strife and bad weather. It also reflects the expiration of a tax exemption on certain big-ticket items that had boosted consumer spending. New restrictions on loans and credit cards were also enacted to chill demand spurred by cheap credit.

The Bank of Korea is more worried about inflation than slow growth. Inflation, at 2.8% in October, is expected to rise next year. Korea can sustain about a 5.5% growth rate without pushing up inflation.

The BOK is especially concerned that low rates are generating too much household debt and a bubble in property values. Housing prices have surged 20% this year. The BOK last lifted its benchmark rate in May, from 4% to 4.25%, but has since held it steady. Most recently, it cited cooler property prices in October and uncertainty in the global outlook. Political considerations may also be a factor, given the December presidential elections.

Although domestic demand is slowing, companies feel little pressure to cut costs, considering solid first-half profits. So labor markets remain healthy, which will limit the consumer-spending slowdown.

Strong exports are essential to Korea's growth goals. Despite a tepid recovery in the U.S., Korea's largest overseas market, exports are booming. That's partly because China, Korea's second-biggest market, is taking up some slack. October exports grew 26%, the fastest yearly rate in more than two years, helped by a 69% surge in shipments to China. This is a key reason why the economy should remain on track next year.

By James C. Cooper & Kathleen Madigan

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