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S Korea 2Q GDP Growth Slows; May Prompt Another Rate Cut

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07/26/2012 | 05:13am CEST

-- South Korea's second-quarter GDP growth below central bank's earlier estimate, market expectations.

-- Weaker growth is due to slower private consumption, decline in exports and facilities investment.

-- Analysts expect second-quarter data to pressure central bank to cut rates again in third quarter to underpin growth.

(Adds BOK official's economic outlook in sixth and seventh paragraphs, and analyst's comment on BOK's next rate move in 13th paragraph.)

   By In-Soo Nam 

SEOUL--South Korea's economy grew at a slower pace than expected in the second quarter as the deepening euro-zone debt crisis hit exports at a time of cooling consumption, adding pressure on the central bank to ease monetary policy further to underpin growth.

But the Bank of Korea and market observers said they still expect economic conditions to improve in the latter part of the year as exports could strengthen on Chinese stimulus and a U.S. recovery, barring further turmoil in Europe.

The country's gross domestic product rose a seasonally adjusted 0.4% in the April-June period from the previous quarter, the Bank of Korea said Thursday. That is below market expectations for 0.5% growth and less than half the first quarter's 0.9% expansion.

On a year-on-year basis, the economy expanded 2.4% in the three months to June, marking the weakest growth since a 1% rise in the third quarter of 2009. That also missed the market's forecast of a 2.6% expansion and is a slowdown from the 2.8% on-year rise in the first quarter of this year.

"Growth in private spending slowed, while exports and facilities investment contracted," the central bank said in a statement released with the data.

Kim Young-bae, director-general of the BOK's economic statistics department, said the Korean economy must perform better than previously expected in the second half, if it is to match the central bank's full-year growth estimate of 3.0%.

"The world economy, as well as our own, is moving on an unpaved road, and the Korean economy has hit a pothole in the second quarter on the way to long-term growth... But I expect conditions to improve for the rest of this year," Mr. Kim said at a media briefing after the second-quarter GDP figure was released.

The BOK expects GDP to sequentially expand at a rate of around 1% in the third and fourth quarters.

Thursday's data showed exports, which account for about half of GDP, declined 0.6% on-quarter in the second quarter after expanding 3% in the first quarter.

Private consumption, one of the main growth engines, gained a mere 0.5%, slowing from a 1% rise in the preceding quarter.

Facility investment contracted 6.4% after growing 10.3% in the previous quarter, while construction investment grew 0.3% following a 1.2% fall in the first quarter.

Analysts expect weak demand from abroad and in Korea to pressure the central bank to cut its policy rate again next month or in September, following its surprise quarter-percentage-point cut to 3% at the latest rate review July 12--the first easing in more than three years.

"There will be another rate cut for sure," said Hyundai Securities economist Lee Sang-jae. "But the latest data indicates a slowdown, not a sharp downturn. Hence, a rate cut in September looks likely."

BOK Gov. Kim Choong-soo Wednesday reiterated that the central bank expects increasing downside risks to its 2012 GDP growth forecast of 3%, which it cut just two weeks ago.

As an export-led economy, South Korea tends to mirror the fortunes of the region, and its GDP numbers are often a harbinger of broader trends.

--Kwanwoo Jun contributed to this article.

Write to In-Soo Nam at [email protected]

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