Weak exports remain a source of worry in South Korea

GDP growth has been revised to 5.3% (QoQ saar) for 3Q, compared to 5.0% in the preliminary figures. The upward revision mainly came from domestic demand, including both private consumption (5.0% vs. 4.7%) and investment (12.8% vs. 12.2%). But exports contracted more than expected, by 2.2% (vs. -1.0% in the initial estimate). On average, domestic demand expanded at a solid pace of 4.6% per quarter so far this year. Exports, on the other hand, barely grew and stagnated at the levels a year ago. 

The picture of weak exports and strong domestic demand remains unchanged this quarter. Retail sales surged strongly in Oct as the effects of a temporary consumption tax cut kicked in. Although exports contracted at a slower rate in Nov, the main reason behind was a low comparison base. The latest PMI survey confirmed that it was the drop in overseas demand that contributed to the weakness in new orders and production. 

Thanks to the strength in domestic demand, GDP growth is expected to be underpinned at the 3% level in 4Q. This should allow the Bank of Korea to maintain its baseline economic forecasts and to hold rates steady at the last policy meeting this year (10th Dec). Domestic growth will lose momentum at some point next year as the effects of policy stimuli will eventually wane. A recovery in exports will be required then to avoid a renewed slowdown in GDP growth. Persistent weakness in exports will be a potential source of worry, given the headwinds from China's slowdown, Fed's tightening and increase in external competitions.