Korea: Economic growth decelerates in Q3, fuels prospects of further easing from BoK
October 25, 2016
The Korean economy slowed down in the third quarter of this year, expanding at the weakest pace in over a year. GDP increased 2.7% in the July to September period, which was notably below the 3.3% expansion recorded in the second quarter but slightly above market expectations of 2.6% growth. Bank of Korea’s Director Chung Kyu-il attributed the subpar reading to the production halt in one of Samsung’s smartphone lines and the prolonged strike in the automotive industry. Despite the headwinds, growth in the third quarter was largely driven by robust government consumption and investment in construction.
Government consumption rose 4.0% in Q3, which was above Q2’s 3.6% reading and the result of additional fiscal stimulus measures implemented at the onset of the quarter. In the second quarter, private consumption had held up remarkably well, but the end of several consumption tax cuts and discounts in June took a toll on household spending in the third quarter and private consumption increased 2.6% (Q2: +3.3% year-on-year). Although weakness in facilities investment persisted in the third quarter, fixed investment was largely supported by the ongoing construction boom, picking up from a 5.3% rise in Q2 to a 5.4% increase in Q3.
On the external side, net exports remained a drag on growth. While exports climbed in Q3 (Q2: +1.9% yoy; Q3: +2.9% yoy), they were outpaced by a larger increase in imports (Q2: +3.3% yoy, Q3: +4.6% yoy) due to increased overseas consumption by residents. As a result, the external sector’s net contribution to overall growth was minus 0.7 percentage points in the third quarter, which was below the 0.6 percentage points contraction recorded in the second quarter.
On the back of an already slowing economy and with several of the growth tailwinds gradually fading, analysts are increasingly expecting the Bank of Korea to cut its policy rate in order to keep the economy afloat. On the country’s woes, HSBC Economist James Lee comments, “Although construction permit issuance remains high on a historical perspective, we believe a sharp rise in unsold homes in the past year and financial regulators’ increased willingness to slow household debt growth will likely result in slowing in the construction sector. Fiscal spending is likely to slow in the current quarter, with the majority of the supplementary budget already spent in September. ”
Author: Ricardo Aceves, Senior Economist