South Korea Economy Slows amid Drought and MERS

by


South Korea quarterly growth slowed to its lowest level in over two years, partly due to MERS, otherwise known as Middle East Respiratory Syndrome, and a severe drought that affected the nation's agriculture sector, according to the Associated Press. The virus has so far killed 36 people since May. Service spending and private consumption also fell, which are both attributed to the MERS crisis. Aside from Saudi Arabia, South Korea has suffered from the second largest MERS outbreak.

The economy grew only 0.3 percent from April to June when compared to the previous quarter. The drought is responsible for an 11.1-percent reduction in farm output, marking the sector's worst performance since Q1 of 1990. South Korean tourism dropped because of MERS outbreak fears, but there have been no new cases since July 4. The loss in tourist numbers is expected to hurt the economy through a 0.1 percentage loss of GDP.

To bolster the nation's ailing service sector, the government is encouraging people to vacation within South Korea. Restaurants and hotels have suffered because of the MERS panic, but the nation's finance minister states that various promotional and advertising campaigns are in the works to promote South Korea as a prime tourist destination. Tourism is improving, but it remains to be seen how the tourist sector will affect the economy going forward.

An analyst from Daewoo Securities believes the economy will expand in the third quarter, but achieving growth over 1.0 percent growth may not be possible. To mitigate the damage, the government is proposing an 11.8 trillion ($10.6 billion) won supplemental budget to counter the effects of the drought and the MERS situation, while aiming to achieve 3.0 percent growth for the year.

The government may be in for a rude awakening, as analysts expect 2.8-percent growth the year, which is well below growth enjoyed before the world recession. Overall, the budget in question may add 0.3 percent to annual expansion.

In addition to MERS and dry weather, exports and private investment dropped as well, and corporate and household debt remains high. International factors are also at play, as the sluggish state of the world economy affects demand markets that South Korea needs to maintain a thriving economy.

For instance, Brazil and China are two important export markets, but demand has been waning for such South Korean products as semiconductors, steel and ships. In addition, South Korean President Park Geun Hye believes the Greek crisis will have a negative impact on the domestic economy for quite a while.

Officials also warned of lower oil prices and Chinese stock market issues as potential liabilities for South Korea's economy. On the plus side, construction investment expanded 1.7 percent, including capital investment, which increased by 0.4 percent.