Korea: The economy maintains its growth momentum in Q2
July 26, 2018
According to preliminary data released by the Bank of Korea on 26 July, the economy grew 2.9% year-on-year in the second quarter of 2018, up slightly from 2.8% in the first quarter and confirming that last year’s strong growth momentum continued into 2018. In seasonally-adjusted terms, output increased 0.7% in the second quarter compared to a quarter earlier, down slightly from the 1.0% increase in the first quarter. The Q2 GDP readings were largely in line with market analysts’ expectations.
The domestic side of the economy had a mixed performance in Q2. Annual private consumption growth slipped to 2.8%, down from 3.5% in Q1. This coincided with a fall in consumer confidence, as optimism fell to its lowest level in a year. Moreover, in H1 2018, unemployment increased compared to H2 2017, which appears to have weighed on consumers’ willingness to spend. Government consumption growth slowed to 4.8% in Q2, one percentage point lower than in Q1. Despite the slowdown, government spending remained strong in the second quarter and was boosted by the extra FY 2018 budget, which was approved by parliament on 21 May and contains USD 3.8 billion worth of additional spending. Meanwhile, fixed investment fell 1.1% in Q2, contrasting the 3.7% expansion recorded in Q1. The conclusion of major capital expenditure projects in the technology sector in the prior quarter reduced business investment in Q2.
On the external front, the economy had a strong showing. Exports of goods and services increased 5.2% in Q2, much more than the 1.6% increase recorded in Q1. Exports were boosted by strong sales of Korean semiconductors abroad, as well as by more Chinese tourist arrivals. Imports grew 2.4% in Q2, less than the 4.2% figure achieved in Q1. Overall, the external sector contributed 1.6 percentage points to economic growth in Q2, contrasting Q1’s detraction of 1.4 percentage points and marking the largest contribution since Q2 2013.
Looking ahead, increased government spending thanks to the expansionary FY 2018 ordinary budget, coupled with pending spending from the extra FY 2018 budget, should support economic growth in the coming months. Moreover, strong stimulus is on the cards for the ordinary fiscal budget in FY 2019. In terms of private consumption, warm summer weather could boost spending in the short term. Downside risks for the economy in the coming months include elevated household debt levels, rising global trade tensions, higher oil prices and signs of an economic slowdown in China.
Korea GDP Forecast
The Central Bank expects the economy will grow 2.9% in 2018 and 2.8% in 2019. The analysts FocusEconomics surveyed this month expect an expansion of 2.9% in 2018, which is down 0.1 percentage points from last month’s estimate. For 2019, our panel again sees an expansion of 2.9%.
Author: Edward Gardner, Economist