Korea: GDP accelerates unexpectedly in Q2
July 26, 2016
The Korean economy accelerated in the second quarter of this year, expanding at the fastest pace since Q3 2014. GDP annual growth increased from Q1’s 2.8% to 3.2% in Q2, overshooting the 2.8% expansion the market had expected. This reflected the positive impact that the government’s fiscal stimulus plan, announced earlier this year, has had on domestic demand. That said, sluggish external demand continued to weigh on exports.
Private consumption accelerated from a 2.2% increase in Q1 to a 3.2% expansion in Q2, since an extension of the tax cut for car purchases until June and discounts on home appliances spurred household spending. Similarly, the current construction boom helped to boost fixed investment, which picked up from a 3.1% rise in Q1 to a 5.1% expansion in Q2. Government spending slowed down slightly, but it still grew at a significant rate (Q2: +3.7% year-on-year; Q1: +4.5% yoy).
On the external side of the economy, exports and imports increased 1.7% and 3.1% in Q2, respectively. The external sector’s net contribution to overall growth was minus 0.6 percentage points in the second quarter, which mirrored a similar detraction in Q1. Regarding exports, Trade Minister Joo Hyung-hwan said that it is difficult to predict if export growth will improve in H2 given that there is increased uncertainty over Brexit and lower demand from China—Korea’s main trade partner.
Despite the economy’s acceleration, there are concerns over whether this respite will be short-lived. ANZ Economists stated that, “the challenges that lie ahead for the South Korean economy in terms of the scope of corporate debt restructuring in a low-trade environment (and with monetary policy nearing its lower limit) are formidable,” and that, “it would be surprising if this economic momentum were to continue.”
Author: Luis Lopez Vivas, Economist