Korea grows 1.1% in Q2

Korea’s economy grew 1.1 percent in the second quarter of this year compared with the first quarter, thanks to government spending and increased construction investment, the Bank of Korea reported Thursday.

This marked the country’s first quarterly growth of above 1 percent in two years. Korea’s gross domestic product growth reached 2.3 percent year-on-year, the highest in 12 months.

Despite the surprising recovery from low growth, the central bank said that the general public may not feel much benefit from this positive outcome as the growth had mostly been led by a few conglomerates in manufacturing sectors such as IT and automobiles.

The central bank attributed its second-quarter economic expansion to the government’s fiscal spending of which about 60 percent had been frontloaded to the first half of this year.

It said that government spending contributed 0.3 percentage point to the first half growth of 1.9 percent, expecting additional fiscal stimulus to further add 0.6 percentage point to growth in the second half.

This, in addition to revived construction investment and brisk exports backed by strong overseas sales of IT gadgets such as smartphones, was able to offset decreased facility investment in the second quarter.

Jung Yung-taek, director of the BOK’s national accounts division projected a rebound in facility investment and in the shipbuilding and shipping industries in the latter half of this year, with IT exports continuing to gain momentum.

“We don’t expect the second-half growth to perform below that of the first half,” Jung said, adhering to the BOK’s forecast of 3.7 percent growth in the second half.

The central bank recently changed its full-year economic growth projection from 2.6 percent to 2.8 percent on the back of the government’s fiscal stimulus and the BOK’s key rate cut in May.

The BOK official added that Korea would remain on its positive course in the remainder of this year despite the adverse effects of a weak Japanese yen and China’s slow growth momentum.

China, Korea’s largest trading partner, grew 7.5 percent in the second quarter of this year from a year earlier, well within the projected range of 7.4 percent to 7.9 percent, according to BOK data.

Korea’s solid current account surplus will likely back its growth, Jung said.

Downside risks to growth remain as Korea continues to face high household debt and a weak housing market, Moody’s Analytics said in a report.

However, these variables are likely to be offset by its fiscal and monetary stimulus. “Measures to support the housing market including tax breaks and fewer borrowing restrictions are set to be voted on and most likely approved by the parliament in coming months, paving the way for stronger household consumption and residential construction in the coming year,” Moody’s said.

By Park Hyong-ki (hkp@heraldcorp.com)