South Korea’s Growth Improves on Consumption, Construction

  • Economy expands 0.7% from first quarter, better than expected
  • Private consumption, construction biggest contributors

South Korea’s growth rate advanced in the second quarter supported by gains in private consumption and construction.

  • Gross domestic product rose 0.7 percent from the first quarter, when it expanded 0.5 percent, the Bank of Korea said Tuesday.
  • This compares with a 0.6 percent increase forecast by analysts surveyed by Bloomberg. The economy grew 3.2 percent from a year earlier.

An extension until the end of June of temporary tax discounts for car purchases helped consumption and a construction boom continued, spurred by low interest rates. The central bank earlier this month cut its full-year GDP forecast slightly to 2.7 percent, citing risks including restructuring of indebted companies, implementation of an anti-corruption law and global uncertainty amid the U.K.’s vote to leave the European Union.

The slightly better-than-expected GDP data “will likely buy the BOK policy board some time to see how fiscal and monetary policy stimulus in the pipeline is evolving in terms of supporting the economy,” said Glenn Maguire, the Asia Pacific chief economist at Australia & New Zealand Banking Group Ltd. in Singapore. “The weight of corporate restructuring -- particularly in employment-intensive heavy industry -- will be a significant drag on the economy in the second half.”

  • Private-sector consumption rose 0.9 percent in the second quarter compared with a contraction the previous three months
  • Construction investment expanded 2.9 percent
  • Government spending expanded 0.2 percent
  • Facilities investment rose 2.9 percent after a 7.4 percent dip in the previous quarter

Of the 0.7 percent growth from the first quarter, private consumption and construction investment contributed the most, adding 0.4 percentage point, respectively. Facilities investments added 0.2 percentage point, while net exports stripped 0.3 percentage point, the statement shows.

The consumption tax cut extension and new product releases for cars and mobile phones had a positive effect on private spending, Kim Young Tai, a director for BOK, said in a briefing on Tuesday. Growth in the first half of the year was in line with central bank projections, Kim said.

Supplementary Budget

The government announced an 11 trillion won ($9.7 billion) supplementary budget last week that will help cushion the impact of corporate restructuring and job losses, especially in industrial cities where shipbuilders are located. The BOK, which lowered its key interest rate to a record 1.25 percent in June, estimates the cut and supplementary budget will boost the growth rate by 0.2 percentage point.

As policy makers step up fiscal and monetary stimulus to boost growth, the anti-corruption law scheduled to take effect in September remains an area of economic concern. Finance Minister Yoo Il Ho told reporters over the weekend that he is worried the law may hurt some industries and affect the rest of the economy. The law places limits on gifts a public official, teacher or journalist can receive. The price cap and appropriateness of the limits is a subject of debate.

Among recent forecasts for South Korea’s economy:

  • After falling for an 18th consecutive month in June, South Korea’s exports are set for another drop in July, based on preliminary figures by the customs office.
  • Economists surveyed by Bloomberg this month expect South Korea’s GDP to increase 2.6 percent this year, slightly lower than the BOK’s projection.
  • Of 27 analysts polled, 15 see one more rate cut by BOK to 1 percent this year, and one sees two cuts to 0.75 percent. The rest see no change at 1.25 percent.

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