Articles
25 July 2019

South Korean economy dodges recession

The Bank of Korea’s policy interest rate cut a week ago is a step in the right direction as the central bank’s 2.2% GDP growth forecast for the year remains subject to asymmetric downside risk

2.1%

2Q19 GDP growth

Better than expected

Growth picks up in 2Q19

South Korea’s second quarter GDP grew by 2.1% from a year ago and by 1.1% (seasonally adjusted) from the preceding quarter. Growth was not only firmer than the Bloomberg consensus estimates of 1.9% year-on-year and 0.9% quarter-on-quarter, but also marked an acceleration from the 1.7% YoY and -0.4% QoQ SA rates recorded in 1Q19. More importantly, the economy avoided a recession with QoQ growth back in positive territory.

Private and public consumption persisted as the key expenditure-side drivers of GDP growth. The contribution of private consumption to GDP growth rose to 1.0 percentage point (ppt) from 0.9ppt in 1Q and that of government consumption was up to 1.2ppt from 1.0ppt. Investments remained a drag albeit smaller than in 1Q (-1.2ppt vs. -2.6ppt in 1Q). And all this more than offset a significant narrowing in the net trade contribution. On the industry-side, services retained their spot as the main driver of GDP growth, while an improvement in manufacturing and utilities also helped.

What's behind firmer GDP growth in the last quarter?

Note: Bars may not stack up to total GDP growth due to statistical discrepancy. - Source: Bloomberg, CEIC, ING
Note: Bars may not stack up to total GDP growth due to statistical discrepancy.
Source: Bloomberg, CEIC, ING

Economy dodges a recession

While YoY growth of 2.1% matched our forecast exactly, we overestimated the QoQ weakness in forecasting no growth for the period. With a 0.4% QoQ 1Q19 contraction and further weakness displayed by activity data in 2Q19, we feared the economy could have fallen into a technical recession. Even the tiniest negative reading (rounding up to our forecast of zero growth) would have resulted in a technical recession defined as two straight quarters of negative QoQ growth.

This would not have been too surprising given that the economy is heavily reliant on exports, which have been beaten up by the US-China trade and tech wars as well as a global tech slump. Electronics exports, a bellwether for the economy which account for a third of total exports, have suffered from a contraction of as much as 20% YoY in recent months, and within that, semiconductors have fared even worse, with a more than 30% fall.

Could it be that the wonky seasonal adjustment for QoQ growth helped the economy to avert a recession?

Electronics dampening export performance

 - Source: Bloomberg, CEIC, ING
Source: Bloomberg, CEIC, ING

Outlook isn’t promising though

Even if the economy has averted a recession for now, the outlook for the rest of the year remains clouded by a worsening external environment, including an ongoing trade spat with Japan.

Just a week ago, the Bank of Korea (BoK) scaled back its growth forecast for 2019 to 2.2% from 2.5%. Average 1.9% GDP growth in the first half of the year precisely matched the BoK's revised forecast for the period. But its 2.4% growth view for the second half of the year appears optimistic. Aside from some favourable base effects (growth slowed sharply in 3Q18), there's no reason for year-on-year growth to recover in the second half. That, too, assumes that things don’t become any worse than they currently are, which is a risky proposition absent any let-up in the export slump.

More easier policy is the order of the day

Better late than never, the BoK’s 25 basis point policy interest rate cut no more than a week ago was a step in the right direction. However, as we argued at the time, this was a mere reversal of the tightening late last year, not a stimulus in any real sense.

The key questions that today’s data pose are whether the BoK will be complacent after an acceleration in GDP growth and stay on hold for the rest of the year, or, will it see through the GDP figure that’s masking underlying weakness in the trade and electronics sectors, and ease policy further with more rate cuts?

Judging from the shift in global central bank policies, increased policy support for growth is the order of the day. We expect the BoK to go with the flow and ease again by 25bp in the final quarter of the year as its 2.2% full year GDP forecast looks increasingly unattainable. ING’s forecast for Korea's full-year 2019 GDP growth is 1.4% (consensus 2.0%).


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).