South Korean economy to grow 2.8 pct in 2016, fiscal policy to remain expansionary ahead

In the first quarter of this year, the South Korean economic growth slowed to 2.7% from Q4 2015’s 3.1%. GDP grew 0.4% on a seasonally adjusted basis, as compared with growth of 0.7% recorded in the fourth quarter of 2015. This indicates deceleration of the pace of growth. Delving into details, the slowdown is broad based. Real exports expanded just a tad in Q1 from previous quarter, while gross capital formation decelerated to 3.5%. Moreover, private consumption also weakened surprisingly to 2.1% in Q1 as compared with the growth of 3.3% in Q4 2015.

Only fiscal sector continues to be a positive factor. In the first three months of 2016, government spending grew to 4.5% y/y from 3.9% in the last quarter of 2015. This has slightly underpinned the economic growth. With the fiscal sector being strong, the fiscal policy is expected to remain proactive in the quarters to come.

“We maintain our forecast at 2.8% for now with risks tilted to the downside”, said Commerzbank in a research note.

The Bank of Korea seems unwilling to further ease policy; however, it permits the exchange rate to have a vital role. The fiscal policy is expected to be expansionary in the coming 12 months in order to offset an economic deceleration.