S Korea grows, but risks worsen

CRUTCH::Analysts do not expect the economy to reach the BOK’s 2.2% forecasted growth for the year, with the latest growth data quashing speculation of a rate cut


Fri, Jul 26, 2019 - Page 10

A rush of government spending helped prop up South Korea’s economy in the second quarter, masking headwinds ranging from a slumping technology sector to rising tensions with Japan.

GDP expanded 1.1 percent from the previous quarter, topping economists’ median estimate of a 0.9 percent gain. It grew 2.1 percent from a year earlier, versus a 1.9 percent estimate.

While that is a rebound from the worst contraction since 2008, private-sector investment shaved 0.5 percentage points off quarterly growth, meaning government investment drove the expansion.

“The details don’t look so good,” JPMorgan Chase & Co economist Park Seok-gil said yesterday. “It’s disappointing that the contributions from private growth are smaller than expected, and facilities investment mostly came from the government.”

Park said he does not expect the economy to hit the Bank of Korea’s (BOK) 2.2 percent growth forecast for this year.

The BOK last week lowered its key interest rate and again cut its growth forecast for this year, this time to 2.2 percent from 2.5 percent, citing risks such as the US-China trade dispute and tensions with Japan.

Exports this month look set for an eighth straight monthly decline, also due to slumping demand and prices for semiconductors, a key growth driver for South Korea.

BOK Governor Lee Ju-yeol this week said that the central bank might have to act again if the economic situation worsens.

The growth data might cool speculation that any such action will come at the next BOK meeting.

“Had the growth come out at under 1 percent, it would have sparked talk about a rate cut at the next Bank of Korea meeting,” KB Securities Co economist Oh Jae-young said. “But it seems like the 2.2 percent annual growth forecast by the BOK isn’t impossible after all.”

Things could still get worse. Japan has placed restrictions on exports to South Korea of three materials vital to semiconductor and display manufacturing, and might yet remove South Korea from its “white list” of trusted export destinations.

Japan accounts for about 32 percent, or about US$3.8 billion, of South Korea’s chip manufacturing equipment imports.

The effects of the trade spat with Japan could be much bigger than tensions between the US and China, and could spill over into other industries, Park Chong-hoon, head of South Korea economic research at Standard Chartered Bank, told Bloomberg TV.

If the Japanese restrictions on exports to South Korea cause a 10 percent fall in semiconductor exports, that could easily slice 0.2 percentage points off overall economic growth, pushing it below 2 percent, he said.