South Korea's Economy Hits a Bump

By Kwanwoo Jun 

SEOUL--South Korea's economy hit a weak note in March as exports shrank more sharply than expected and manufacturing slid back into contraction.

The soft picture is likely to intensify political calls for more fiscal or monetary stimulus. In March, the central bank cut its policy rate to the lowest level on record.

The trade ministry said Wednesday exports--which account for about half of the country's growth--declined 4.2% from a year earlier. Economists had expected a decline of 0.5%. Exports fell 3.3% in February.

Lower oil prices eroded the value of Korean petroleum and petrochemical products overseas, the ministry said. The weak exports were also due to a slowdown in China, which takes in a quarter of Korea's total shipments overseas, it added.

Korea's factory-floor conditions worsened in March, separate data showed. The HSBC Korea manufacturing purchasing managers index fell to 49.2 in March from 51.1 in February and January. Readings below 50 indicate manufacturing activity is in contraction.

"This was underpinned by a fall in new orders, with the rate of decline the fastest in over one-and-a-half-years," Markit Economics analyst Amy Brownbill said.

Prices of Korean equities dropped in early trade Wednesday following the data. The benchmark Kospi Composite index was down 0.6% around midday.

Other data showed South Korea's inflation slowed to a nearly 16-year low in March. The state-run statistics agency said the consumer-price index rose 0.4% year-to-year in March--the weakest since July in 1999--following a 0.5% gain in February.

Lower utility rates and stable farm-produce prices kept inflation below 1% for a fourth month in March, officials said.

"Soft inflation may support expectations of further monetary easing," Barclays economists said in a research note.

The central bank delivered a 0.25 percentage-point rate cut in March, taking the policy rate to a record low of 1.75%.

Korean policy makers have dismissed the possible risk of deflation, saying the slower prices were largely due to lower oil prices and other supply-side factors.

From the prior month, the index remained unchanged in March. Core CPI, which strips out volatile energy and food prices, rose 2.1% year-to-year in March. The index rose 0.2% in March from the previous month.

The latest readings were all below the central bank's annual inflation target band of 2.5% to 3.5%. Inflation averaged 1.3% in 2014.

The trade data also showed imports plunged 15.3% from a year earlier in March, following a revised 19.7% decrease in February.

The sharper drop in imports than in exports created a trade surplus of $8.39 billion in March, widening further from the previous month's revised $7.71 billion. The trade balance has been in the black since February 2012.

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