By Nam Hyun-woo
The Korean economy in the second quarter grew 0.8 percent from three months earlier, posting growth slightly better than the 0.7 percent estimated in July, central bank data showed Friday.
However, as the economy continues growth below 1 percent for three straight quarters, concern over prolonged low growth is emerging, with the third quarter growth facing downside risks.
According to the Bank of Korea (BOK) preliminary data, Korea’s real GDP stood at 375.33 trillion won ($335.45 billion) in the second quarter, growing 0.8 percent from three months earlier.
The quarter-on-quarter growth is 0.3 percentage points faster than that of the first quarter and the highest since the third quarter last year with 1.2 percent.
In annual terms, the local economy expanded 3.3 percent in the second quarter, compared with 2.8 percent year-on-year growth in the previous quarter.
The reading came after increases in domestic expenditures, such as private consumption, construction and facilities investments.
Private consumption rose 1 percent following increased expenditures on durable goods, such as automobiles. Construction investment expanded by 3.1 percent following the increase in building, while facilities investment grew 2.8 percent, with increases in transport equipment and machinery investments.
Despite the increases, Korea’s GDP growth continued at below 1 percent since last year’s third quarter. Except for that period, the country’s GDP has been growing by less than 1 percent for eight straight quarters.
Analysts say that Korea’s economic growth is heavily dependent on construction, which is booming due to low interest rates, but that may deter the economy down the road.
“The government’s frontloading of the budget supported growth in the second quarter, especially in construction activities and domestic spending,” said Kathleen Oh, economist at Standard Chartered Korea. “However, we think they were one-time factors and will not continue.”
One of the one-time factors was a temporary tax cut on cars, which expired in June. When the effect vanishes, the third-quarter growth will likely be slowed further.
Another downside risk is the ongoing corporate restructuring. The progress of corporate restructuring is picking up, which should have negative spillover effects.
“Downside risks from industrial restructuring in the domestic market and still-lingering external uncertainties pose dangers to growth outlook. I think the economy will show a decreasing growth pace into the third and fourth quarters.”
To cope with downside risks, the government is pinning its hopes on an 11 trillion won supplementary budget, which passed the National Assembly on Thursday.
“The recent recovery in economic data and the passing of the supplementary budget will likely lead the Bank of Korea to keep the current rate on hold next week,” Oh said. “We think the BOK will face less pressure to make another rate cut with the domestic data showing a continued recovery trend.”
Meanwhile, the BOK said the country’s real gross national income (GNI) decreased by 0.4 percent from three months earlier. This is the first time that real GNI decreased since the third quarter of 2014. The BOK attributed the decrease to worsening terms of trade and the contraction of net factor income from the rest of the world.