MERS drives consumption lower in Korea's Q2 GDP

The conditions for a late-summer acceleration, in Korea's IP and exports remain in place, although modest, helped by inventory destocking in the electronics and auto sectors, and a stronger recovery in the US and Europe.

On an expenditure basis, net exports and consumption were the main factors behind the soft Q2 print. Net exports subtracted 0.2pp from the overall q/q growth rate, on the back of prolonged weakness in exports. That was compounded by soft consumption, which slumped to a drag on growth in Q2, following three consecutive quarters of expansion.

Gross fixed capital formation was the major growth contributor, though smaller than in previous quarters. While there was a welcome q/q pickup in facilities investment, its percentage contribution to growth remained essentially zero, as larger businesses continue to be hesitant to invest amid aweak growth outlook and an unfavourable tax environment.

According to Barclays,
 

• The soft Q2 print reinforces the need for a weaker KRW bias.
• The weak path of growth increases the risk of a further rate cut in the remaining months of Q3. However, with rates at an all-time low, the additional impulse to growth would be nearly negligible. 
• As such, the BoK is expected to stay on hold for the rest of the year.
• Given the weaker-than-expected Q2 outturn, Korean GDP growth for 2015 is forecasted 2.6%, and for 2016 to 3.7%. 
• Meaningful sequential pickup in H2, as the shock from the MERS outbreak subsides, which likely leads to a payback in consumption.
• A package of KRW15trn could lift growth by 0.5pp, although the impact will be felt mainly in 2016.