Wednesday, October 27, 2010

Korea's 3rd Quarter GDP. Maybe the BOK and the Korean Government Are Right

This week, Korea's 3rd Quarter GDP figures were released, and they were decidedly...lukewarm at best, and according to the words of the Associated Press, economic activity has slowed markedly as the global economic recovery slows.

On the bright side, the year-over-year change was an increase of 4.5%, which is substantially higher than other OECD over this timeframe.  Unemployment, although it increased last month, remains near the lowest levels of all OECD countries at 3.7%, up from 3.4%  The KOSPI has risen to the highest level in three years.

On the other hand, problems persist.  The quarter-over-quarter change was only 0.7%, as exports slowed.  You can see from one of my previous posts, that Korea remains a vulnerable one-winged bird because one wing (exports) is keeping the bird flying, while the other wing (domestic demand) is not.  The BOK and the Korean administration have continually tried to downplay the strength of the Korean economy, much like its Canadian counterpart.  As Koreans know, the residential real estate market is stagnant, especially compared with its Asian (ex-Japan) counterparts.  Some of that has to do with stricter bank regulations and tax laws which have intentiaonally restricted investment in real estate.  Other negative factors include the slightly higher borrowing rate for mortgages, the strength in the Japanese Yen (see here), the aging population, and the large number of empty developments outside of Korea (신도시).  This is particularly damaging to domestic demand because there is much higher percentage of family wealth invested in real estate than in most other countries.  Therefore, the "wealth effect" that accompanies higher home prices is largely absent in Korea. 
To the average Korean, the argument of "at least we are not Japan" is of little consolation as rising food prices have hit the average Korean particularly hard.  The KOSPI's relentless rise this year has not made most Korean citizens happy because their share ownership is quite low compared to their net worth.  In short, the benefits that would otherwise be enjoyed by citizens when the equity market rises is not being enjoyed by the average Korean, and that affects consumption.  Naturally, that in turn affects GDP.  When you couple that with the prospect of a slower global recovery than anticipated, the Korean government has been correct to reduce its fiscal stimulus only slowly, and the Bank of Korea has rightfully resisted calls for greater appreciation of the Korean Won. Both parties are serving the interests of the Korean people at this time.  Now, that does not mean that will be no adverse consequences, but the current path seems to the less of two evils.

The Lost Seoul


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