South Korea Economy's Return to Growth Masks Worsening Risks
Things could still get worse.
(Bloomberg) -- 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.
Gross domestic product expanded 1.1% from the previous quarter, topping economists’ median estimate of a 0.9% gain. GDP grew 2.1% from a year earlier, versus a 1.9% estimate. While that’s a rebound from the worst contraction since 2008, private-sector investment shaved 0.5 percentage point off quarterly growth, meaning government investment drove the expansion.
"The details don’t look so good,” said Park Seok-gil, an economist at JPMorgan Chase & Co. "It’s disappointing that the contributions from private growth are smaller than expected, and facilities investment mostly came from the government."
Park said he doesn’t expect the economy to hit the Bank of Korea’s 2.2% growth forecast for this year.
The return to growth was announced as SK Hynix Inc., the nation’s biggest semiconductor maker after Samsung Electronics Co., said it expected a "significant" cut in its 2020 investment after second-quarter operating profit plunged 89% from a year earlier. That’s just the latest evidence that that global demand for semiconductors remains in a slump.
Also Thursday, North Korea launched at least two short-range missiles into the sea east of the Korean Peninsula, a development likely to weigh on sentiment.
Just last week the Bank of Korea lowered its key interest rate and again cut its 2019 growth forecast, this time to 2.2% from 2.5%, citing risks such as the U.S.-China trade war and tensions with Japan. Exports look set for an eighth straight monthly decline in July, also due to a slumping demand and prices for semiconductors, a key growth driver for South Korea.
BOK Governor Lee Ju-yeol said this week that central bank may have to act again if the economic situation worsens. The latest growth data may cool speculation that any such action will come at the next BOK meeting.
“Had the growth come out at under 1%, it would have sparked talk about a rate cut at the next Bank of Korea meeting,” said Oh Jae-young, an economist at KB Securities. “But it seems like the 2.2% annual growth forecast by the BOK isn’t impossible after all.”
Japan Dispute
Things could still get worse. Japan has placed restrictions on exports to South Korea of three materials vital to semiconductor and display manufacturing, and may yet remove South Korea from its “white list” of trusted export destinations. Japan accounts for about 32% or roughly $3.8 billion of South Korea’s chip manufacturing equipment imports.
The impact of the trade spat with Japan could be much bigger than tensions between the U.S. and China, and could spill over into other industries, Park Chong-hoon, head of Korea economic research at Standard Chartered Bank, told Bloomberg TV.
If the Japanese restrictions on exports to Korea cause a 10% fall in semiconductor exports that could easily slice 0.2 percentage point off overall economic growth, pushing it below the 2% mark, he said.
What Bloomberg’s Economists Say
“Weakness in investment -- the main drag on growth -- is likely to persist in the near term. Increased uncertainty surrounding South Korea’s trade spat with Japan could add to the blow from slowing external demand and the ongoing U.S.-China trade dispute.”
--Justin Jimenez, Bloomberg Economics
Click here to read the report
--With assistance from Shinhye Kang, Paul Jackson and Sohee Kim.
To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Henry Hoenig, Jiyeun Lee
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