South Korea's economic growth slows on weaker exports

South Korea's economic growth slowed in the second quarter as exports and manufacturing weakened.

The annual rate of growth was 3.4% in the three months to the end of June, down from 4.2% in the previous quarter. Quarter-on-quarter growth was 0.8%.

The slowdown comes as demand from key markets such as the US and Europe has been hit by a slower economic recovery and debt concerns.

Analysts said Korea's outlook remained volatile due to issues in key markets.

"Export growth will ease as uncertain US economic prospects will leave us mainly reliant on demand from emerging markets and China, where demand again could be hit by a potential slowdown in exports to the US," said Ryan Oh of Samsung Securities.

Growing concerns

The slowdown in exports is the latest in a series of economic problems that have hurt the country's growth.

Exports from South Korea grew at an annual rate of 10.2% during the period, a decline from 16.8% in the previous three months.

While weak demand from key markets has hit growth, the sector has also been hurt by a strengthening currency.

The Korean won has risen more than 10% against the US dollar in past one year. A strong currency does not bode well for the export-dependent economy, as it makes Korean goods more expensive to foreign buyers.

At the same time, South Korea has been facing sluggish domestic demand and there have also been worries that rising levels of household debt may further slow growth.

Household debt has reached more than 800 trillion won ($750bn; £469bn).

Analysts said the combination of these factors poses a big threat to Korea's growth.

"Big risks remain [to Korea's economic growth] because domestic demand is not expected to show any sharp improvement in the near future," said Park Hee-Chan of Mirae Asset Securities.

Jun Min-Kyoo of Korea Investment & Securities added that the household debt was driving down demand in the housing sector and impacting construction activity in the country.

Balancing act

The slowdown in pace of growth comes at a time when Asia's fourth-largest economy has been trying to curb rising prices.

The Bank of Korea has raised the cost of borrowing 4 times in the last 8 months in an attempt to slow price growth.

The latest hike in June, pushed the central bank's main interest rate to 3.25%.

Despite hiking interest rates, the central bank has raised its projection for inflation, saying it expects consumer prices to grow by 4% this year, fuelling speculation that it may raise the cost of borrowing again in the coming months.

However, as the pace of growth slows, there are worries the central bank may have to rethink its monetary policy.

"The Bank of Korea is now concerned about the economy entering a [period of] slowing growth coupled with high inflation phase, which will make it difficult to decide on policy direction," said Samsung Securities' Ryan Oh.

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