Korea's Growth Falls From Five-Year High as Property Boom Cools

  • Housing transactions slowing in fourth quarter hurt economy
  • Economy grew 2.6 percent in 2015 as exports slump persisted

Expect Korean Economy to Decelerate in 2016: HSBC

South Korea’s growth rate retreated from a five-year high as a surge in property transactions that supported the economy earlier in 2015 fizzled out.

Gross domestic product rose 0.6 percent in the fourth quarter from the previous three months, when it jumped by 1.3 percent as shoppers went back into stores following the MERS outbreak, according to data released by the Bank of Korea Tuesday. The economy expanded 2.6 percent in 2015 from a year earlier, the slowest pace since 2012.

Tepid growth underscores the difficulties policy makers face relying on domestic demand to shore up growth as China’s slowdown and global uncertainties hit export industries. While the central bank and the government both project that the economy will expand at least 3 percent this year, economists surveyed by Bloomberg estimate just 2.8 percent.

“The economy in 2015 was supported by government policies to boost domestic demand through consumption and the property market, while exports played a negative role,” said Park Sang Hyun, a Seoul-based economist for HI Investment & Securities Co. “I expect GDP growth in 2016 to be at 2.6 percent as domestic demand can lose its momentum on sustaining growth.”

Construction investment fell 6.1 percent during the October-December period from the previous quarter, according to Tuesday’s data. Private consumption expanded at 1.5 percent and government spending was up 1.2 percent, while exports rose 2.1 percent by volume.

While housing transactions surged to a record 1.19 million units this year, supported by low borrowing costs, the pace slowed in the fourth quarter. Transactions fell 10 percent in December from the previous month, data from the land ministry showed.

The housing market is being affected by tighter lending rules designed to curb debt growth. Construction also was hurt as state-run organizations, which used up most of their budgets on building infrastructure earlier in 2015, cut back on investment.

“Property transactions fell in the fourth quarter due to base effects from a surge in the first three quarters of 2015, and the government’s infrastructure investment also slowed,” Jeon Seung Cheol, a director general at the BOK, said in a briefing. “Consumption in the fourth quarter was supported by government agendas including retail promotions and tax breaks.”

Government Measures

Private spending may be weaker in 2016 as government measures including temporary tax cuts on things like cars and large promotion events at retail stores ended in December. Structural and demographic issues including high household debt and an aging population are also affecting consumer spending.

The economy’s rebound in the third quarter came as an outbreak of the Middle East Respiratory Syndrome in Korea faded as shoppers returned and the government introduced temporary consumption tax cuts and an extra budget.

Exports were the weakest point for the economy in 2015. They shrunk 7.9 percent in value terms from the previous year as lower oil prices cut the value of related products, the global economy slowed, and a change in China’s economic structure reduced demand for Korean components and intermediate goods.

Overseas sales for the first 20 days of January fell 8.9 percent from a year earlier, data from the Korea Customs Service showed, poised for a 13th monthly decline. China is South Korea’s biggest trading partner and accounts for a quarter of its exports. Shipments to China dropped 5.6 percent in 2015.

Net exports stripped 1.2 percentage points from 2015 GDP growth, while domestic demand including private consumption and construction added 3.7 percentage points, BOK’s statement showed.

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