Korea's weak GDP underscores need for weaker KRW

Korea's weakness in GDP and growth can be attributed to the sharp contraction in private consumption, as the recent MERS outbreak dampened consumer confidence, which ultimately weighed on private spending and services. 

The advance estimate of Q2 15 GDP reported growth of 0.3% q/q sa. On an annualised basis, growth slowed to 1.2% q/q saar, which translates into 2.2% y/y, the slowest since Q1 13. 

Meanwhile, the severe drought affected agricultural production, which added to the trend of continued weakness in external demand amid higher inventories, which precipitated sluggish IP and exports in Q2. 

"Given today's weaker-than-expected Q2 outturn, full-year growth is forecastd for 2015 to 2.6%, and cut the 2016 growth forecast 30bp, to 3.7%", says Barclays. 

Also, a late-summer acceleration, although more modest, in IP and exports remains in place, helped by inventory destocking in the electronics and auto sectors, and a stronger recovery in the US and Europe.

"That said, a meaningful sequential pickup in H2 is still expected, as the shock from the MERS outbreak subsides, which likely leads to a payback in consumption as seen from the 2003 SARS outbreak", added Barclays.