Korean exports slump, further rate cut likely

SEOUL - Korea’s exports contracted sharply by 14.7% y/y in August, falling short of market expectations (-5.9%) by a large margin. Imports also tumbled by 18.3%, and the trade balance dropped from US$7.72 billion in July to USS4.35 billion.
ANZ Bank says that while the product breakdown has not yet been released, there are signs that the decline in exports was broad-based.

“Judging from the release of July’s industrial production statistics, we not only have seen a fall of conventional sector like automobile (-2.3% y/y) but also the ICT segment (-5.7%) which has been the backbone of Korea’s manufacturing.” ANZ says.
“Recent developments in the global market pose a significant challenge to Korea’s growth outlook. China is Korea’s top export market, representing about 25.1% of its total exports. Tourism has been a key pillar offsetting the downturn of merchandise trade.
“Chinese tourists accounted for 44.6% of visitor arrivals in January-July. We estimate that the tourism sector accounts for 1.7% of GDP in 2015 and Chinese tourists alone could have contributed about 0.76% to GDP. A devaluation of the RMB will decrease China’s spending power and hurt Korea’s exports and tourism.”
Based on the trade results, ANZ has cut its GDP forecast for South Korea further from 2.7% to 2.2% for 2015 and from 3.2% to 2.9% for 2016
The bank also believes that the extent of the trade slump is large enough to trigger another interest rate cut in September (from 1.5% to 1.25%). www.live.anz.com (ATI).