Gross domestic product expanded 1.5 percent in the three months ended June 30, compared with the first quarter this year when it grew 2.1 percent, the Bank of Korea announced Monday. Compared with the same period last year, the economy grew 7.2 percent. The figures are preliminary and may be revised.
South Korea, Asia’s fourth-largest economy, has rebounded strongly from the global downturn to expand six straight quarters, boosted by record-low interest rates, government stimulus spending and robust exports.
The latest GDP figure, which beat the central bank’s own forecast as well as analyst estimates, comes amid worries about the durability of the global recovery. Monetary authorities are raising interest rates, government stimulus programs that have helped promote growth are winding down, the US is showing signs of slowing and questions linger about Europe’s financial health.
“The data show that at least through the second quarter, like most of the Asian region, the Korean economy continued on a strong uptrend,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.
Cohen also said, however, that the result comes amid broader concerns about future direction as “like everywhere, people are nervous about sustainability of the momentum.” In the second quarter, South Korea’s manufacturing, exports and capital spending all posted increases from the previous three months. Exports of goods grew 7.1 percent, led by increased shipments of automobiles, semiconductors and machinery, the bank said.
Exports have been a key factor behind Asia’s recovery.
Japan’s exports rose for the seventh straight month in June, indicating that overseas demand continues to underpin recovery in the world’s No. 2 economy even amid a stronger yen. Exports climbed 27.7 percent from a year earlier to 5.87 trillion yen ($67.2 billion), the Finance Ministry said Monday.
South Korea’s growth was tempered, however, as the construction sector shrank 0.8 percent during the second quarter compared with a gain of 1.9 percent in the first.
Services growth slowed to 0.2 percent following an expansion of 1.6 percent. Government spending eked out growth of 0.1 percent, down sharply from the 5.8 percent registered in the first quarter.
“Exports are strong. That’s the secret of Korea’s success,” said Oh Suk-tae, regional head of research in South Korea at Standard Chartered First Bank Korea. “The problem is its sustainability.” Oh said the contraction in construction backs up worries about South Korea’s weakening housing market, whereas the slowdown in government spending came as little surprise as it was frontloaded into the first quarter. The 1.5 percent growth figure equates to an expansion of 6 percent on an annualized basis, he said.
The result came in stronger than a consensus estimate of 1.1 percent quarter-on-quarter growth in a survey by Yonhap Infomax, the financial arm of South Korea’s Yonhap news agency. The BOK had forecast growth of 1.2 percent earlier this month.
South Korean financial markets rose. The benchmark stock index gained 0.6 percent to 1,769.07 for its highest close this year. The South Korean won, meanwhile strengthened to 1,191.10 to the dollar from 1,198.80 on Friday for a gain of 0.6 percent.
The Bank of Korea earlier this month raised its 2010 economic growth forecast to 5.9 percent. Also, at its July policy meeting the bank lifted its key interest rate to 2.25 percent from a record low 2 percent, the first increase since August of 2008, amid the strong growth outlook and expectations for higher inflation.
Standard Chartered First Bank Korea’s Oh said BOK policymakers are in a bind as they want to keep raising rates, but may find the environment difficult. He predicted they will act quickly and hike the bank’s benchmark borrowing cost next month by 0.25 percentage point to 2.5 percent before pausing for the rest of this year.
Cohen, of Action Economics, said the central bank was more likely to move twice more this year and close out 2010 with the key rate at 2.75 percent.
That would still remain far below the 5.25 percent where the seven day repurchase rate stood when the BOK’s record easing cycle began in October 2008 as a response to the global financial crisis.
