Clouds may be gathering over South Korean economy

04 Aug, 2004

South Korean businesses are becoming more pessimistic, according to Tuesday data that reinforced concerns about an economy also expected to suffer from rising oil prices.
The central bank's index of business sentiment dipped for a third consecutive month in August to a year low of 73 from 78 in the previous month - meaning a rising number of companies expect their businesses to worsen.
Energy costs are one worry for the economy, which has relied on exports from its energy-intensive manufacturing sector to pull it out of a brief recession suffered in early 2003.
"Korea has an economic structure more sensitive to energy costs than rival countries, and this means the impact from high oil prices is heavier," said Lee Soo-hee, an economist at Korea Economic Research Institute.
US oil prices reached just under $44 a barrel on Monday, the highest since oil futures were launched on the NYMEX exchange in 1983.
Such oil prices could deal an especially severe blow to South Korea's economy because the country is the world's sixth-largest oil consumer and imports all its crude.
South Korea's current dependence on exports makes it particularly vulnerable to rising production costs or diminished demand from trading partners whose economies might also suffer from the higher price of oil.
South Korea would be less reliant on exports if its own consumers were spending strongly - but they are not, and show little sign of doing so any time soon, although a measure of department store sales published on Monday was stronger in July than a year earlier.
The Federation of Korean Industries, a lobby group for large companies, said on Tuesday its index of business sentiment had risen to a seasonally adjusted 96.4 for August from 91.5 for the previous month.
But a federation official said the rise could not be seen as a sharp improvement in sentiment because the index remained below the benchmark of 100 for a sixth consecutive month.
On Monday the country posted the highest consumer inflation in 16 months for the year through July, 4.4 percent, driven by higher oil and public transport prices.
Commerce ministry data showed on Sunday the country's exports rose by a stronger-than-expected 38.4 percent in the year through July despite worries a slowdown in China's economy would hurt South Korea's exports, a fifth of which go to China. Growth is expected to slow in coming months, however.

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