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The preliminary customs release has dashed any hopes of a quick recovery in external trade with exports set to fall for an eighteenth straight month in June. The customs data showed that exports fell by 12.8 percent y/y in the first 20 days of June while imports were down 13.7 percent y/y. Higher than the previous reading, when exports fell by 6.0 percent y/y in May while imports fell by 9.3 percent y/y.
As we have been pointing out, exports remain under pressure due to sluggish global demand, especially slower growth in China and the frail recovery in the Eurozone. Moreover, continued economic uncertainty is likely to subject highly leveraged emerging economies in Asia, not least South Korea’s, to financial instability.
Recently, Bank of Korea (BoK) Governor Lee said that emerging Asian economies have substantial external debt and are, therefore, particularly vulnerable to external shocks.
Meanwhile, the price pipeline remains beneficial to firms as costs continue to decline. The PPI release for May (on Monday) came in at –3.1 percent y/y after –3.0 percent y/y in April as lower oil prices reduced the prices of manufactured goods. In fact, prices of manufactured goods fell by 5.4 percent y/y in May after –5.5 percent y/y in April and electricity, water and gas charges printed –7.3 percent y/y in May after –9.0 percent y/y in April.
At the same time, the CPI remains well below the BoK’s annual target band, moderating to 0.8 percent y/y in May from 1.0 percent y/y in April. But as we have been highlighting, the rise in household debt remains a major concern for policymakers with BoK Governor Lee calling for “swift” measures to contain it.
Recall that data released earlier this month showed that bank loans to households increased by 6.7 trillion South Korean Won in May to 660.9 trillion South Korean Won due to a sharp rise in mortgage loans. Still, ever-higher household debt is unlikely to turn into a systemic risk for now as the delinquency ratio remains low and banks are adequately capitalised.
