Asia Economy

What’s behind Korea’s export shocker?

Ed Jones | AFP | Getty Images

South Korean exports tanked by the most in six years in August – and here's why you should take note.

The 14.7 percent on-year fall in exports last month was the steepest decline since August 2009 and well below economists' forecasts in a Reuters poll for a 10 percent fall.

Economists say the slump is largely attributable to the slowdown in China, which is sapping demand for Korean goods. China is Korea's largest export market, taking around one-quarter of its shipments abroad, according to Reuters.

"It started with investment-related industries, but now consumer export items will also be challenged due to asset price correction in China," said Sharon Lam, economist at Morgan Stanley. Furthermore, as China moves up the value chain, it is relying less on goods from abroad.

"China is going to export more which will compete directly with Korea in the global markets," said Lam, who refers to Korea as the "broken export machine".

The disappointing data prompted Morgan Stanley to downgrade its growth outlook for Asia's fourth largest economy on Tuesday to 2.3 percent in 2015 and 2.2 percent in 2016 from 2.5 percent and 3.2 percent, previously.

The Bank of Korea's growth forecast for this year is 2.8 percent while the finance ministry set its target at 3.1 percent, compared with last year's 3.3 percent.

"As growth is likely to disappoint, we now expect the BoK [Bank of Korea] to cut rates once again in 4Q15 to bring the policy rate to an unprecedented 1.25 percent. We believe this could take place as early as October," Lam said.

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The slowdown in Korea's export sector is the latest headache for policymakers who have spent recent months battling to contain an outbreak of the deadly Middle East Respiratory Syndrome (MERS), which has taken a sizable toll on its economy.

The economy grew just 0.3 percent in April-June over the previous quarter, the weakest expansion since the first quarter of 2009, amid the virus outbreak, dry weather and poor exports.