South Korean economy grows 1.5 pct q/q in Q1, exports to bottom out in Q2

The South Korean economy expanded 1.5% q/q saar in the first quarter of 2016, according to the first quarter GDP estimate released today. This is the slowest pace in more than five quarters; however, it is consistent with consensus expectation, noted DBS Bank. In the first quarter, exports shrank 6.4%, while facilities and private consumption contracted 21.7% and 1.2% respectively.

As imports declined 13.4% in Q1, exports contributed positively to the economic growth. Meanwhile, government consumption and construction investment, which grew 5.2% and 25.8% respectively, also helped drive the economic growth. This indicates the growth in public spending.

“We keep the full-year GDP forecast at 2.6% after the 1Q16 data release. This assumes a nearly flat growth in 2Q16 (2.2%) and a modest rise in 3Q- 4Q15 (3% on average)”, said DBS Bank.

In Q2 2016, exports are likely to bottom out as global financial markets stabilize and business confidence rebounds, according to DBS Bank. Since major economies’ growth continue to be at subpar levels and activities in interregional trade low, it will take time for a considerable rebound. Furthermore, decline in domestic demand will counter the increase in exports as it has been almost one year since the BoK lowered rates. Also, in June 2016, the temporary reduction in consumption tax applied on automobiles will come to an end.

Investment and consumption growth outlook are likely to have risks on the downside as the effects of stimulus fades away fully in the following months, added DBS Bank. The Bank of Korea expects South Korean economy to expand 2.8% in 2016. Authorities will continue to be under pressure to add monetary and fiscal stimulus in 2016, noted DBS Bank.