By Christian Oliver in Seoul
South Korea?s economy is weakening in the run-up to general and presidential elections that could trans-form Seoul?s policies towards both welfare spending and the new leader in North Korea.
Gross domestic product in Asia?s fourth-biggest economy grew only 0.4 per cent in the final quarter of 2011 compared with the previous three months, marking the slowest growth in two years. In the third quarter it had grown 0.8 per cent, the central bank said on Thursday.
Investment in machinery and transport fell 5.2 per cent compared with a 0.8 per cent drop between July and September. Consumption by indebted households fell 0.4 per cent after rising 0.4 per cent in the third quarter, the first contraction in nearly three years.
The data from the central bank also revealed a sharp decline in the growth of exports, which are both the bedrock of the South Korean economy and a bellwether of global industrial demand. Exports of goods grew only 5.2 per cent in the final quarter compared with a year earlier. In the first quarter of 2010, they had grown 20.8 per cent.
The finance ministry predicts export growth will slow to about 7.4 per cent over this year from nearly 20 per cent last year.
Ronald Man, economist at HSBC, said weakness was ?now embedded inside Korea?s economy?. He predicted the central bank would have to respond by cutting the base rate to 3 per cent from the current 3.25 per cent in the first quarter of 2012.
Despite the death of Kim Jong-il, the North Korean dictator, late last year, the flagging domestic economy is shaping the political battle lines before a parliamentary election in April and a presidential vote in December, when Lee Myung-bak, a conservative, will step aside.
Han Myeong-sook, chairwoman of the leftwing Democratic United party, has announced she is campaigning on a platform of ?livelihood politics?. The left has pledged to build a deeper social safety net in South Korea, where welfare spending is currently about one-third of levels in western Europe. Ms Han is promising nationwide free school lunches, child care and medical treatment.
South Korea?s rightwing politicians argue such schemes will damage Seoul?s finances, but they are also tailoring more policies towards the poor.
Park Geun-hye, the most likely conservative presidential candidate, has announced little substantive policy as she tries to overhaul her scandal-stricken Grand National party. Still, she has tried to overhaul the conservatives? plutocratic reputation by saying she would like to increase capital gains tax on major financial investors.
Both the traditional left and rightwing parties are in disarray after a leftist independent comfortably won October?s vote to become mayor of Seoul. They fear a popular internet entrepreneur called Ahn Chul-soo could also use his popularity among young people to win the presidency as an independent.
However, Mr Ahn is guarded about whether he will run.
While economic issues such as high living costs and youth unemployment are dominating the election race, a swing to the left could also soften Seoul?s policy towards Pyongyang.
? The Financial Times Limited 2012