Korea heading for soft landing
By Glenn Levine
The Korean economy expanded by 0.7 percent in the third quarter compared to a quarter-prior period, coming in slightly above expectations for a 0.5 percent increase. The economy grew 3.4 percent a year earlier, unchanged from the previous quarter. This confirms that Korea is growing slightly below trend.
On the expenditure side, all components expanded through the third quarter. Consumer demand rose 0.6 percent compared to a quarter-earlier period; government spending rose 1.3 percent; fixed investment rose 1.3 percent, led by a 2.2 percent jump in construction; exports of goods and services rose 2 percent; and imports rose 1.8 percent. From a year ago, all components expanded except for investment, which fell 1.6 percent from a year ago. It is following a couple of week quarters earlier in the year from which it is still recovering.
Consumption spending, exports and imports were all strong, rose by 2.5 percent, 9.4 percent and 6.4 percent, respectively.
On the industry side, the big surprise was again in construction, which jumped 4.1 percent from a quarter-earlier period. The rest was a little mixed. Manufacturing rose 1.3 percent, which was in line with expectations, but agriculture plunged 6.1 percent. Wholesale and retail trade fell 0.1 percent.
On a year ago basis, the big drivers were manufacturing, a 6 percent year-over-year increase and wholesale and retail trade climbed 4.8 percent. GDP growth was 3.0 percent on a quarter-over-quarter annualized rate.
This GDP print confirms that the Korean economy remained resilient through the third quarter of 2011 and in on track for a soft landing, with slightly below-trend growth expected to run until around the middle of 2012.
The headline was a little stronger than expected ― we had been tipping a milder 0.5 percent quarter-over-quarter increase as recent industrial production numbers have been a little weak. In the end, however, Korea’s export and manufacturing sectors held up, with both recording solid expansions. The export numbers were particularly strong, suggesting little impact from the easing global economy ― either in Europe or China ― through the third quarter.
A couple of other aspects stand out. The first is that the expansion appears solid and is broad-based. All sectors on the expenditure side are now expanding and most on the industry side.
This suggests that the current upturn is robust; the economy is unlikely to contract if one sector such as households or exports should suddenly slow. The other interesting aspect was that construction appears to have finally bottomed after contracting at a rapid clip in previous quarters. The housing market has been a large drag on growth and remains weak, but is perhaps unlikely to get any weaker in the current environment, so long as employment holds up.
This solid set of numbers largely reaffirms our outlook on the Korean economy. There isn’t’t too much cause for concern here and our current forecast for 3.6 percent GDP growth in 2011 and 3.4 percent in 2012 remain intact. Growth is slightly below trend and this is expected to continue in the current environment. There are some downside risks to growth, mostly external in nature, but even these are unlikely to derail the current expansion.
Glenn Levine is a Sydney-based analyst at Moody’s Investors Service.