South Korea Growth Surges to Fastest in More Than Two Years

South Korea’s economy grew the most in more than two years, on stronger government spending and private consumption even as a slowdown in China clouds the outlook.

Gross domestic product rose 1.1 percent in April-to-June from the previous quarter when it rose 0.8 percent, the Bank of Korea said today in a statement in Seoul. That was above the median 0.8 percent estimate of 13 economists surveyed by Bloomberg News. From a year earlier, Asia’s fourth-largest economy expanded 2.3 percent.

President Park Geun Hye boosted spending and the central bank cut its key rate in May, buttressing the economy against a sluggish property market and slower growth in China, South Korea’s biggest trading partner. The central bank is counting on improving domestic demand and resilient exports to achieve forecasts for expansions of 2.8 percent this year and 4 percent next year, the fastest since 2010, when the economy was pulling out of a global slump.

“The GDP figures are a positive surprise, which will give investors more confidence about the economic outlook,” said Lee Jae Hyung, a fixed-income analyst at Tongyang Securities Inc. in Seoul. “Today’s data will reduce calls for further monetary easing. The next rate move for the BOK will be a hike.”

Exports Slow

The won weakened 0.6 percent to 1,119.50 against the dollar as of 9:00 a.m. in Seoul after rising to a six-week high yesterday, according to data compiled by Bloomberg. The Kospi stock index fell 0.3 percent to 1,906.57, roughly in line with a decline in the MSCI Asia Pacific Index.

Government spending rose 2.4 percent in the second quarter from the previous three-month period, when it expanded 1.2 percent. Private consumption rebounded, rising 0.6 percent after a 0.4 percent drop in the first quarter. Construction investment gained 3.3 percent, while facilities investment declined 0.7 percent.

South Korea’s exports of goods and services increased 1.5 percent in the second quarter, slowing from a 3 percent rise in the previous quarter, as the yen’s more than 24 percent fall against the won over the past 12 months gives rival Japanese exporters a boost.

Slowing growth in emerging economies and discussion in the U.S. of a rollback in Federal Reserve stimulus are risks to the global economy, Finance Minister Hyun Oh Seok said today at a meeting in Seoul. South Korea and its Group of 20 partners last week agreed in Moscow that such exit strategies should be carried out carefully in close communication with the market, Hyun said.

“I assess that the agreement secured the minimum safety net we need to ease market uncertainties,” Hyun said.

China Risk

Slower growth in China is “a major risk” to South Korea’s outlook, given Korea’s manufacturing sector has significant trade and investment exposure to the world’s second-biggest economy, said Ma Tieying, an economist at Singapore-based DBS Group Holdings Ltd. The preliminary China Purchasing Managers’ Index fell to 47.7 in July from 48.2 in June, further below the level of 50 that separates contraction from expansion, HSBC Holdings Plc and Markit Economics said yesterday.

“A slowdown in China will inevitably cause some adverse impact on the Korean economy.” said Ma before the GDP data were released.

Growth Potential

The economy will expand 3 percent in the second half of 2013 and 4 percent next year, “close to our potential” growth rate, Hyun said in an interview in Moscow last week. Governor Kim Choong Soo, who raised the BOK’s growth forecasts on the fiscal and monetary stimulus, said on July 11 the economy will grow 1 percent or so each quarter into next year, reaching its potential output by 2015.

The government obtained a 17.3 trillion won ($15.5 billion) extra budget in May from parliament and front-loaded about 60 percent of spending in this year’s main budget to the first half of the year.

The government will outline a plan by the end of August to lower taxes on home purchases after introducing tax breaks for first-time buyers earlier this year to halt a property-market slump. Home prices slipped 0.21 percent in the first six months of 2013, following a 0.03 percent drop last year on sluggish demand and oversupply, according to data from Kookmin Bank, the nation’s largest mortgage lender.

Real-Estate Falls

“This sustained fall in real estate prices bodes ill for private consumption,” said Juliana Lee, a Hong Kong-based economist at Deutsche Bank, said in a report on July 19.

SK Hynix Inc., the world’s second-largest maker of computer-memory chips and a supplier for smartphone manufacturers including Apple Inc., today posted profit that exceeded analysts’ estimates, buoyed by a rise in prices of semiconductors used for personal computers and mobile devices.

The economy is growing more strongly than expected, BOK National Accounts Division Director Jung Yung Taek told reporters in Seoul today.

“The chances are not big that the second half will be weaker than the first half, given a recovery in shipbuilding and sustained strength in semiconductors and smartphones,” said Jung. “Our growth forecast of 2.8 percent for this year is achievable.”

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