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Korea GDP Q2 2018

Korea: The economy loses growth momentum in Q3

According to preliminary data released by the Bank of Korea, the economy grew 2.0% year-on-year in the third quarter, down significantly from the 2.8% increase recorded for the second quarter. Although the slowdown was partly due to a high base effect, economic fundamentals were also at play. In seasonally-adjusted terms, output increased 0.6%, matching the reading for the second quarter. Both growth figures for Q3 undershot market analysts’ expectations.

The domestic side of the economy had a downbeat performance in Q3. Annual private consumption growth slipped to 2.6%, down from 2.8% in Q2. This was likely due to falling consumer confidence, which dipped into pessimistic territory for the first time in 17 months in August before rebounding in September. Moreover, the average unemployment rate rose in Q3 compared to both the previous quarter and the same quarter a year earlier. Government consumption growth inched down to 4.7% in Q3 from 4.8% in Q2. Meanwhile, fixed investment fell at an accelerated rate, down 6.5% in Q3 following Q2’s 1.3% contraction. This was largely due to a slump in spending on construction and business investment.

Exports increased 3.1% in Q3, down from the 4.8% rise observed in Q2. The lower reading for Q3 was due to weaker growth in exports of both goods and services. Imports fell 1.2% in the third quarter (Q2: +2.0% year-on-year) due to fewer purchases of goods from abroad and stagnant purchases of services from abroad. Overall, the external sector contributed 2.3 percentage points to economic growth in Q3, up from 1.5 percentage points in Q2 and the highest contribution since Q2 2013.

Looking ahead, the economy is forecast to grow at a broadly steady rate. Higher government spending is on the cards as outlined by the Moon administration’s budget proposal for 2019, which sets out the largest government spending increase in a decade. Moreover, monetary policy will remain accommodative by historical standards, even if it tightens slightly as expected. However, elevated household debt, rising global trade protectionism, higher oil prices and an economic slowdown in China all weigh on the outlook.

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