Q2 growth slows (modestly) in South Korea

SEOUL - The narrative on growth in South Korea changed in Q2 2017. The most important change was that exports declined 0.1% y/y (-3.0% q/q sa) – this marked the first contraction in eight quarters, says ANZ Bank.

“Underlying this weakness was a marked slowdown in goods exports to 1.7% y/y from 6.6% y/y in Q1 2017,”ANZ says.

“The divergence between slowing real exports of goods and the monthly trade numbers confirms our longstanding view that higher price realisations are playing a critical role in the current export cycle.

“Aggregate consumption firmed up to 2.4% y/y from 2.2% y/y previously. The improvement was both at the public and private level.

“Investment spending remained robust rising 10% y/y. Within this overall category, we note that investment in plant and equipment or facilities investment increased a solid 17.2% y/y.

“As the strength of this component remains at odds with sub-trend levels of capacity utilisation, we believe it is narrowly confined to a select set of products, most likely select sub-sectors of the electronics industry.

“We expect public spending to play a more dominant role in shaping South Korea’s growth in H2 2017.”

ANZ says the recently approved supplementary budget of KRW11trn or 0.7% of GDP, 70% of which will be expended in this quarter, is expected to add 0.2% to 2017 growth. This is likely to ensure that the official 2017 GDP forecast of 3% is achieved.

“This growth trajectory is unlikely to have an immediate bearing on inflation. Year to date, inflation has only occasionally breached the mid-point of the Bank of Korea’s inflation target corridor of 1.5%-2.5%.

“We expect this pattern to persist through 2017 and most of 2018. Accordingly, we see little reason for the Bank of Korea to shift its currently accommodating policy stance.”  www.live.anz.com (ATI).