Investment in Korea

Korea - Investment

Korean economy finds its footing in second quarter, revived by fiscal stimulus

According to preliminary data released by the Bank of Korea, the economy grew 2.1% in annual terms in the second quarter, rebounding from the first quarter’s near-decade low 1.7% expansion and surpassing market expectations of 2.0% growth. In quarter-on-quarter terms adjusted for seasonality, the economy grew 1.1% in Q2, recovering from the 0.4% contraction registered in Q1 and beating market expectations of 1.0%.

The year-on-year acceleration in the second quarter was primarily driven by a surge in public consumption as the government ramped up spending to support the frail economy (Q2: +7.3% year-on-year; Q1: +5.5% yoy). Moreover, private consumption also strengthened slightly after the marked slowdown at the start of the year (Q2: +2.0% yoy; Q1: +1.9% yoy), despite falling consumer confidence and a higher unemployment rate in Q2. On a drearier note, fixed investment continued to be the worst performer, posting its fifth consecutive contraction in Q2, albeit a notably softer decline than in Q1 (Q2: -3.6% yoy; Q1: -8.6% yoy). The fall in Q2 was due to a drop in facilities investment, while construction investment also fell sharply.

The external sector had a modest performance in the second quarter, overcoming the drag from the global tech slowdown. Growth in exports of goods and services rebounded 1.5% from the 0.2% slump in Q1, chiefly due to robust exports of services as goods exports dipped again, likely due to weak demand for semiconductors. At the same time, imports of goods and services also recovered, expanding a scant 0.1% in Q2 (Q1. -5.1% yoy). Overall, the external sector contributed 0.6 percentage points to economic growth in Q2, down from the 2.0 percentage-point contribution in Q2.

While Q2’s upturn is a promising sign for the Asian powerhouse, intensifying external headwinds—mainly a weakening global tech sector and the prolonged U.S.-China trade war—suggest the economy is by no means out of the woods just yet. Notably, the nascent Japan-Korea trade dispute that erupted in June could further encumber the external sector. Prospects for the domestic economy are also fraught with risks, as consumers turned pessimistic in the second quarter, while slowing household income and high consumer debt will likely constrain private consumption. Likewise, business confidence remains in the gutters and the still-sluggish tech sector suggests a recovery in investment is unlikely to materialize any time soon. That said, fiscal stimulus should continue to support growth in H2 thanks to the government’s supplementary budget, while the Bank of Korea’s rate cut in July should also help keep the economy afloat.

The Bank of Korea expects the economy to grow 2.2% in 2019 and 2.5% in 2020. FocusEconomics panelists pencil in softer growth of 2.0% in 2019, which is down 0.2 percentage points from last month’s estimate, and 2.4% in 2020.