Nation’s GDP growth hits 10-year high in first half

By Kim Jae-kyoung

Staff reporter

The Bank of Korea (BOK) said Monday that the Korean economy may have entered an expansion phase, hinting that it will shift the focus of its monetary policy from “economic growth” to “price stability” down the road.

The upbeat analysis came after the central bank announced that the nation’s gross domestic product (GDP) grew 7.2 percent in the second quarter from a year earlier, bringing the figure for the first six months to 7.6 percent, the fastest growth in 10 years. The GDP expanded 1.5 percent on a quarter-to-quarter basis.

“The economy has sustained stronger-than-expected growth, suggesting that economic growth has recovered to the pre-crisis level and that the economy entered an expansion phase,” BOK director general Kim Myung-kee told reporters.

“The robust performance was mainly due to strong overseas shipments and a pickup in domestic demand,” he added. Exports, which account for about 50 percent of GDP, jumped 7.1 percent on-quarter, while private spending rose 0.8 percent, compared with a 0.7 percent gain in the preceding quarter.

The central bank’s positive outlook suggests that it is moving toward another key rate hike to curb rising inflationary pressure propelled by a faster-than-expected economic rebound.

The statement that the economy may have entered an expansion stage implies that the central bank sees the economy as having escaped from a trough and now moving to a peak. An expansion stage is a period when business activity surges and gross domestic product expands until it reaches a peak.

Accordingly, Kim’s remarks can be interpreted as a signal that the central bank will raise its key rate by another 25 basis points to 2.5 percent in August or September. On July 9, it raised the key rate to 2.25 percent from the record-low 2 percent, the first hike in 17 months.

Market experts said that the second-quarter GDP growth underpins growing optimism over Asia’s fourth largest economy, forecasting that it will lead to another rate increase in the months to come.

“I think the Korean economy already entered an expansion phase late last year in terms of being on a growth trajectory. Now it is in a cruising phase, gradually soaking up the unemployed labor force, the best indicator to watch for real progress and inflationary risks,” Market Force Company CEO James Rooney said.

“It is almost certain that the BOK will raise the key interest rate during the next six months. But I still believe that raising it too early will not be useful, and I hope that the BOK will be patient before making another rate hike in the next month or two,” he added.

Early this month, the BOK upgraded its 2010 growth forecast to 5.9 percent from an earlier projection of 5.2 percent. The government put its economic growth estimate at 5.8 percent for this year.

In the meantime, buoyed by the GDP surprise, the stock market enjoyed another bullish run, with the benchmark KOSPI hitting a yearly high of 1,769.07, up 1.01 points, or 0.63 percent from the previous close.

Yield on 3-year treasury bonds rose by 3 basis points to end at 3.85 percent, on rising expectation that the central bank will raise its key interest rate again in the months to come.