Since South Korea is a large importer of oil from the Gulf region, the direction the Bank of Korea (BoK) takes will have a direct impact on the region, showed an economic report here on Monday.
The South Korean economy has been accelerating since the end of 2012. However, there are signs that the expansive period might be coming to an end. Real GDP growth in the second quarter of 2014 was lower than in the previous period, from 4.1 percent to 3.4 percent YoY, with domestic demand components shrinking sequentially for two consecutive quarters, said the report, compiled by the Kuwait China Investment Company (KCIC).
Higher frequency data also point to an ongoing deceleration in the third quarter. Industrial production and PMI are prime examples, it said.
Industrial production also declined 1.6 percent compared to last year. Additionally, prices have remained subdued for an extended period of time, with a greater decline in September bringing the figure down to just 1.1 percent YoY, from 1.5 percent YoY in August, it said.
Although it is fair to say that most of the weakness comes from non-core components, core inflation lies clearly below the Bank of Korea's (BoK) inflation target of 2.5-3.5 percent, the report added.
Aware of the weakness of the Korean economy, the BoK moved to a more dovish stance recently, in support of the government's stimulus efforts. In August's policy meeting, the base rate was cut by 25 bps, to 2.25 percent, it indicated.
Household debt in South Korea is high, hovering above 70 percent of GDP. Although it is not clear how much of an impact will easier monetary policy have on household debt, authorities are remaining cautious, the report showed.