South Korea's growth still in line with expectations

The latest trade and manufacturing data were not as bad as feared. Exports fell 8.3% (YoY) in Sep, a smaller decline compared to -14.9% in Aug and better than the consensus forecast of -11.8%. Contrary to expectations for a contraction, industrial production posted a 0.4% (MoM sa) rise in Aug. Manufacturing PMI also showed a modest improvement, climbing to 49.2 in Sep from 47.9 in Aug. Meanwhile, consumption and services activities continued to recover as expected. Retail sales and services output both registered two consecutive months of notable increases in Jul-Aug. 

There is a high chance that the economy has rebounded last quarter after being disrupted by the MERS earlier this year. GDP growth should have picked up to a circa 4% (QoQ saar) in 3Q, significantly up from 1.3% in 2Q. This bolsters the case that the Bank of Korea will hold rates steady at the next policy meeting on 15th Oct (before releasing the GDP figures on 23rd Oct). 

Admittedly, downside risks remain. Some of the leading indicators suggest that investment growth may lose momentum in 4Q (e.g., machine orders, construction orders, business sentiment). China's slowdown and global market volatilities should have added uncertainties for the business outlook and prompted some corporates to postpone investment decisions. Unless external headwinds intensify and the overall growth path is derailed, however, the BOK will refrain from further rate cuts. According to the minutes for September's meeting, board members acknowledged that downside risks to the growth outlook have increased, but the impact won't be significant enough to warrant further policy easing. 

In addition, the board members stressed that the persistence of low growth was caused by structural factors, recognizing the limit of monetary policy and the need for taking reforms to boost potential growth. This shows the reluctance of policymakers to pursue overly aggressive monetary easing, probably owing to the concerns about the side effects including household debt expansion and financial imbalance.