Models pose for photographs with Hyundai’s New sedan ‘The AG’ in Busan. South Korean exports in July grew at their fastest annual clip in seven months, but relatively subdued inflation and weakness in shipments to China kept alive the prospect of a rate cut at this month’s central bank policy review.

Reuters/Seoul

South Korean exports in July grew at their fastest annual clip in seven months, but relatively subdued inflation and weakness in shipments to China kept alive the prospect of an interest rate cut at this month’s central bank policy review.

A combination of still-tepid global demand and weak domestic consumption have seen Asia’s fourth-biggest economy lose momentum in recent months, and yesterday’s batch of data backed market expectations for the Bank of Korea to add to the government’s $11bn stimulus package announced last week.

“The possibility of a rate cut still stands as this week’s data including the output data showed overall performance of the economy was far from improving very fast,” Park Sang-hyun, chief economist, HI Investment & Securities.  Many analysts now expect the Bank of Korea to trim the policy interest rate by 25 basis points to 2.25%, perhaps as early as at its August 14 meeting. It last cut the rate by the same margin in May last year.

A rate cut may also help the economy to move past the ripple effects from April’s ferry accident, which depressed consumer and business sentiment.  Crucially, South Korea’s manufacturers are not selling nearly enough to their biggest export market China, which took some of the shine off total July shipments growth of 5.7% from a year earlier to $48.42bn – the biggest rise since December.

Exports to China, which takes about one-quarter of Korea’s shipments, fell a sharp 7.0% in July from a year before, trade ministry data showed.  Kwon Pyung-oh, head of the ministry’s trade and investment bureau, told reporters the government is “very concerned” about the drop in exports to the world’s second-biggest economy.

Sales to the US, however, jumped 19.4%, while those to the European Union rebounded from the prior month’s fall, rising 11.5%.  Taken together, analysts still see sluggish exports growth over the rest of the year, as a slowdown in China and a largely uneven global recovery drag on the export-reliant economy.