South Korean economy to slow to 2.8 pct this year on account of subdued trade

In the first quarter, the South Korean economy slowed to 2.8 percent y/y from 3.1 percent in the last quarter of 2015. The economy, on a seasonally adjusted basis, grew 0.5 percent in the first quarter, as compared with the fourth quarter's 0.7 percent. This shows that the Korean economic growth momentum is decelerating, said Commerzbank in a research report.

The slowdown is mainly because of subdued trade sectors and its spillover to corporate investment. Real exports hardly expanded in the first quarter from the previous quarter’s 2.5 percent growth. In the mean time, gross capital formation decelerated in the first quarter to 3.5 percent from the last quarter of 2015’s eight percent growth.

Furthermore, private consumption weakened surprisingly to 2.1 percent in the first quarter from 3.3 percent in the last quarter of 2015.

“Overall, we maintain our forecast at 2.8 percent for now with risks tilted to the downside,” added Commerzbank.

Meanwhile, the Bank of Korea, in June, surprisingly lowered its policy rate by 25 basis points to a record low of 1.25 percent. Given the subdued growth and inflation outlook, the reduction in rate was warranted. However, the timing of the cut was a surprise as it was delivered before the FOMC meeting and Brexit referendum.

Moreover, the Korean government and the BoK will jointly create a fund worth KRW 11 trillion to recapitalize policy banks. The fund is likely to begin operation on July 1 and carry on through the end of 2017, noted Commerzbank.