South Korean exports in November topped expectations while inflation picked up, reinforcing market views that the central bank will keep interest rates steady for some time despite worries about Europe's deepening debt crisis. Analysts said the resilience in both export and inflation data was unlikely to last as the global economy would slow further and domestic demand in Asia's fourth-largest economy is expected to remain depressed.
Highlighting that deteriorating outlook, South Korea's manufacturing activity shrank for the fourth straight month in November and new export orders continued to contract, a separate survey showed on Thursday. "I don't think the resilient exports are sustainable. The whole world is cooling, so exports will inevitably weaken in the coming months," said Park Sang-hyun, economist at HI Investment & Securities.
"Inflation will move sideways or gradually head downward, although the latest co-ordinated liquidity supply measures and the resultant spike in some commodities prices are now emerging as a fresh boost to inflation here." Exports grew 13.8 percent from a year earlier, beating the 12.7 percent growth forecast in a Reuters poll, while year-on-year inflation for the month picked up to 4.2 percent from 3.6 percent in October, government data showed.
Overseas sales recovered after suffering a weaker-than-expected 8.0 percent annual gain in October, but the outlook remains grim with the euro zone crisis seen weighing on the region's economies for a long time. Shipments to the European Union fell 11.4 percent in the first 20 days of November from the same period last year, according to a more detailed breakdown of the export data.
But robust shipments to China, Southeast Asia and the United States helped cushion the impact of shrinking European demand. Exports by South Korea, home to such global players as Samsung Electronics and Hyundai Motor, started slowing from September as increased uncertainty over the global economy sapped consumer confidence. Meanwhile, the November data showing inflation would remain elevated supported expectations that the Bank of Korea would not join a wave of monetary easing by other central banks in major economies any time soon.
Brazil and Thailand cut interest rates on Wednesday while China cut banks' reserve requirements for the first time in three years. "Inflation is still around the 4 percent level, making it hard (for the Bank of Korea) to lower rates. We think the rate will be unchanged until the first half of next year." said Sun Yoo, economist at Woori Investment & Securities. The Bank of Korea, whose single most important mission is to keep inflation stable, has a target of keeping annual consumer price index growth between 2 percent and 4 percent on average for the 2010-2012 period.
In addition to softening global demand, domestic demand in South Korea also remains weak as households struggle under a growing debt burden while the construction sector suffers from a sluggish property market. Manufacturing sector activity shrank by the most in 13 months in November as orders declined from customers both at home and abroad.
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