Asia Morning Bites

Export growth moderated slightly, rising by 0.9% in 1Q24 (vs 3.5% 4Q23) but import growth contracted 0.7%. Monthly trade data suggests that strong IT exports continued but that auto exports slowed in the first quarter, causing a moderation of export growth. Imports fell as capital goods imports (IT-related equipment) reduced. The contribution to growth from net exports declined slightly to 0.6pp from 1.0pp in 4Q23. The low level of inventories should support a rise in production and exports in the coming quarters, but imports are likely to rebound strongly on the back of higher commodity prices. Consequently, the contribution of net exports to growth is likely to decline a bit further in the current quarter.

Turning to domestic growth, consumption (0.8%) and construction (2.7%) surprisingly showed solid growth. Concerning private consumption, monthly retail sales and service activity fell in the first two months of the year, so we think that strong household consumption abroad, rather than domestic consumption, was probably the main reason for the acceleration in private consumption and we are treating the strong private consumption data with caution.

For construction, we think the government’s acceleration of infrastructure projects and completion of a major residential development probably led to the rebound of construction growth. We still think it is a temporary rebound and that the underlying trend of weak construction investment is will continue in the coming quarters.

Based on today’s higher-than-expected 1Q24 GDP, we will revise up our annual GDP forecast (currently 1.7%) and we now expect annual GDP growth to exceed 2%. However, in terms of growth momentum, we expect quarterly GDP growth to slow in the coming quarters as higher commodity prices weigh on the trade balance while investment is likely to turn negative.

On the back of this solid growth report, the Bank of Korea’s (BoK) main concern will remain inflation. Unless domestic growth conditions deteriorate significantly, the BoK’s hawkish stance will continue longer than we thought. We still need to review April’s inflation data and the policy stance of the two newly appointed monetary board members. But considering the current macro conditions, we think that the first-rate cut is likely to be postponed until 3Q24.