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Business sentiment fell again in today's survey, and has now only been worse during the global financial crisis and covid. Exporter sentiment has ticked-down, but the weakness is much more apparent in domestic, non-manufacturing sectors. Further policy easing is ahead.
"It's like we're suddenly in a dark tunnel because of the change in the tariff policy of the US, so in this dark situation, it's better to adjust the speed a little bit and wait until it gets a little brighter".
The economic environment for Korea is about as bad as it can get. Despite the short-term rebound in house prices, that suggests more rate cuts, starting at this week's meeting, that will ultimately take the policy rate below neutral. The one caveat I have is the stickiness of services inflation.
Unemployment in Korea remains low, but it is clear that the cycle low has been seen. Private sector business sentiment has been pointing to falling employment, and that even before the export recession that is highly likely in the next few months.
With public services prices rising in March, the upwards drift in private services prices of recent months is now showing in core inflation. It still isn't high, but with business surveys suggesting some pressure on goods prices too, inflation is becoming more of a constraint on BOK action.
Business confidence remains extremely weak, and consumer confidence isn't a whole lot better. That being the case, the BOK is going to want to cut further, but inflation readings in the sentiment surveys aren't giving the all-clear for an aggressive loosening.
Tuesday's minutes of the February meeting show concern about weak growth. The impact of higher $KRW on inflation was played down, and the committee didn't discuss the rising services prices that have worried me. Perhaps not surprisingly given rates were cut, household debt was back on the agenda.
There's no change in weak activity, and that even before Trump's reciprocal tariffs. The KRW has been stable, but the warning signs of a rebound in property have been accurate. The direction of policy rates is still down, but household debt issues will once again complicate the outlook for the BOK.
Korea's cycle data remain soft, with exports softening again in February. Inflation also eased last month, and with no news yet on the hoped-for supplementary budget, there's nothing new to stand in the way of the BOK's cutting cycle.
For the third time since October, the BOK cut rates today. It expects to cut rates further, and although one dynamic affecting the scope and timing will be house prices, the bank also hopes for fiscal policy, which is the one driver it can identify that could serve as an "upside factor for growth".
As it did in January, a BOK cut next week seems likely. Of course, the bank didn't cut in January, so this forecast risks whiplash. But to turn market pricing, the bank would need to indicate an end to loosening, which is unlikely unless it highlights household debt or services inflation.
This is a shorter thematic note than usual. In the longer piece last week, I didn't come up with a chart that nicely summarised Korea's export challenge. I think I have it now. While Korea is holding on in DM, it is losing market share just about everywhere else, being pushed out largely by China.
The rebound in headline employment in January wasn't broad, with jobs in the private sector remaining weak. With no reversal in the sharp rise in the participation rate of recent years, and the number of part-time jobs still rising, the labour market is likely less tight than headline data suggest.
Data today show the rise in underlying inflation that has been underway for almost a year continuing. But yesterday's minutes of the last BOK meeting show that notwithstanding the rise in $KRW, weak growth rather than rising inflation remains the much bigger concern.
Today's GDP release shows Korea's economy only grew in Q124. After that, activity stagnated. Q125 is likely to be worse, given the collapse of domestic confidence after the martial law fiasco, a deterioration confirmed by the BOK's confidence surveys that were also released the last couple of days.
Contrary to my thinking, the bank didn't cut today. The reasoning – KRW weakness and political uncertainty – wasn't a shock. However, the tone of the meeting was very doveish, with the bank talking about "intensified" downside risks to growth. Korea really looks very different to Japan and Taiwan.
I've revised my model for the BOK's reaction function. That suggests the probability of loosening tomorrow is about the same as the Q4 meetings when rates were cut. Considerations for later in the year are yesterday's SLO survey warning of a rebound in housing, and firm services CPI.
Recent data and the minutes of the November BOK meeting offer a good opportunity to look at Korea in light of the latest bout of political turmoil. The conclusion: a weak cycle is getting weaker, and so exchange rate depreciation is unlikely to stop the BOK cutting further.
Today's headline employment data were stable, but the details are weaker, and the weakness in business confidence points to employment falling in 2025. Separate export data for the first 10 days of December show momentum remaining weak.
Headline November CPI data don't challenge the BOK's confidence that inflation is under control. But private services inflation continues to creep up, with SAAR now above 3%. That core has remained around 2% is because of cheaper public services. With budget tightening, that seems tough to sustain.
As expected, weak growth is now the BOK's main concern, with the bank reacting by cutting rates for a second consecutive time. The bank was already feeling confident about CPI, and worries about property have now also receded. If planned measures constrain $KRW upside, further rate cuts are likely.
Today's business survey shows activity taking another step-down. The reason is the rolling over of external demand, which matters even more when domestic demand is already so weak. Price data this month aren't so soft, but cycle concerns are likely to become the number one concern for the BOK.
The BOK has been slow to cut, and when it finally did in October, its tone was hawkish. Since then, however, growth of both exports and household debt softening. This opens up room for the BOK to become more doveish, with the risks being KRW weakness, and sticky services price inflation.
In recent years, trade and FDI flows from Taiwan and Korea have clearly shifted from China to the US. That's what Trump One and Biden wanted, but Trump Two won't like the rising trade deficits, or the CHIPS and IRA subsidies. If he threatens tariffs, will Taiwan offer a stronger TWD in response?
If the BOK was only looking at growth, then data today would give it plenty of room to cut faster, with both Q3 GDP and October business sentiment weak. However, the rise in US rates and consequent weakening of $KRW will be starting to constrain the bank once again.