South Korea’s Economy Grew 1.4% in the Second Quarter

South Korea’s Economy Grew 1.4% in the Second Quarter
Vehicles intended for export at the Port of Pyeongtaek in Pyeongtaek, South Korea. Industrial production expanded for the 13th straight month in July, exports advanced for the 10th consecutive month and consumer prices rose 2.6 percent in August, separate reports showed this week. Photographer: SeongJoon Cho/Bloomberg

South Korea’s economy expanded at almost the same pace in the second quarter as initially estimated, fueled by demand for the nation’s exports of semiconductors and electronic products.

Gross domestic product grew 1.4 percent over the three months to June from the first quarter, compared with a July estimate of 1.5 percent, the Bank of Korea said in Seoul today. The economy grew 7.2 percent from a year earlier, matching the earlier estimate.

The figures affirm the resilience of a number of Asia-Pacific nations to slowdowns in the U.S. and China, after Australia reported its fastest expansion in three years this week and India grew 8.8 percent. While a cooling global economy could test the region’s recovery, the International Monetary Fund said on Sept. 1 that South Korea will expand 6.1 percent in 2010 and has room to raise interest rates further.

“The economy did so well in the first half and remains very strong thanks to exports,” Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, said before the release. The Bank of Korea will keep raising rates as the global economy may slow “but is unlikely to fall into a double-dip recession,” he said.

The central bank increased the benchmark rate by a quarter-point to 2.25 percent in July, the first advance since the global financial crisis. It left the benchmark unchanged last month, while signaling further increases to damp price pressures stoked by the domestic recovery.

Export Gains

Industrial production expanded for the 13th straight month in July, exports advanced for the 10th consecutive month and consumer prices rose 2.6 percent in August, separate reports showed this week. The trade surplus will reach $32 billion in 2010, up from an earlier estimate of $20 billion, the Ministry of Knowledge Economy said two days ago.

The won climbed 0.3 percent to 1,180.90 per dollar in Seoul yesterday, according to data compiled by Bloomberg. The currency touched 1,177, the strongest level since Aug. 19, buoyed by optimism its recovery can withstand global risks. The benchmark Kospi stock index gained 0.6 percent to 1,775.73.

Consumer prices may rise above 3 percent in the fourth quarter and reach 3.4 percent in 2011, central bank Governor Kim Choong Soo said last week. July’s rate increase “may not be sufficient” and future moves will depend on domestic and global economic developments, he said. Kim and the policy board next meet to decide on the benchmark rate on Sept. 9.

Inflation Target

The monetary authority’s inflation target is 2 percent to 4 percent on average through 2012. The government is increasing power and gas prices over August and September, which may push consumer price growth higher up the target range. The tariff gains will add about 0.1 percentage point to inflation, the finance ministry said in July.

“Inflation stayed well under control until August but consumer prices will likely rise to the 3 percent level as early as September, forcing the central bank to move ahead,” Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul, said before today’s release. Another quarter-point increase next week will be unsurprising, Kong said.

Exports are equivalent to about half the economy and a 1.4 percent decline in the won this year has boosted overseas demand for products by firms including Samsung Electronics Co., Asia’s biggest maker of semiconductors, flat screens and mobile phones, and Hyundai Motor Co., South Korea’s largest automaker.

Trade Outlook

Still, trade gains may begin to slow in the fourth quarter amid signs the currency is set to rise, according to the head of South Korea’s trade agency.

“The most critical factor is whether the won remains at the current level,” Cho Hwan Eik, president of Korea Trade-Investment Promotion Agency, said in an interview in Seoul on Aug. 31. “We’re not in a safe zone given that global economic turbulence will continue for quite a while.”

Goods exports rose 7 percent in the second quarter, compared with the July estimate of a 7.1 percent gain, today’s report showed. Private consumption advanced 0.8 percent and government spending increased 0.1 percent, both the same as the previous estimates.

The IMF earlier forecast 5.75 percent expansion in the South Korean economy this year. The won remains “undervalued,” the organization’s staff said in a consultation report discussed by senior IMF officials last week.

-- Editors: Sunil Jagtiani, Cherian Thomas

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