Korea: GDP growth picks up in the second quarter amid favorable base effect
Economic growth accelerated in the second quarter, with GDP increasing 5.9% on an annual basis according to a preliminary reading (Q1: +1.9% year-on-year), marking the best result since Q4 2010. However, the annual print benefited from a low base effect and underlying dynamics point to a slowdown, with economic growth moderating to 0.7% on a seasonally-adjusted quarter-on-quarter basis in Q2 from 1.7% in the previous quarter.
On the domestic front, the year-on-year print came on the back of an improvement in private consumption, which grew 3.6% in Q2 following a 1.2% expansion in Q1. Meanwhile, government spending picked up to a 5.3% increase in Q2 (Q1: +2.3% yoy), amid an increasingly expansionary fiscal stance after another supplementary budget was approved in early March. However, fixed investment growth moderated to 3.6% in Q2 from 4.0% in the prior quarter, amid weaker construction investment.
Growth in exports of goods and services accelerated to 22.4% year-on-year in the second quarter, which marked the best reading since Q1 2018 (Q1: +5.1% yoy), on an upturn in both merchandise and services exports. In addition, growth in imports of goods and services picked up to 13.7% in Q2 (Q1: +4.1% yoy), marking the best reading since Q2 2011. This was likely as a result of recovering domestic demand, as services imports rebounded from a deep contraction in Q1.
Looking ahead, economic growth faces headwinds amid a new round of restrictions imposed in July to curb the latest surge in Covid-19 cases. Commenting on the short-term outlook, Robert Carnell, regional head of research for Asia-Pacific at ING, said:
“Both the household spending surge and the associated import spike will ease back next quarter as the economy normalises, and as slightly tighter Covid mobility restrictions weigh on activity, especially spending on services. Service sector spending was very strong according to the output-based measures of GDP released alongside the expenditure data.“
Analysts at Goldman Sachs added:
“While we are reducing our forecast for private consumption in Q3, we expect positive momentum to be sustained […], helped by reduced sensitivity of economic activity to tighter social distancing measures as well as a recently adopted pandemic relief measure of KRW 11 trillion for households (0.5% of quarterly private consumption).”