South Korea economy returns to growth on public spending as outlook darkens

Gross domestic product expanded 1.1 per cent from the previous quarter, topping economists' median estimate of a 0.9per cent gain. PHOTO: REUTERS

SEOUL (BLOOMBERG) - South Korea's economy returned to growth in the second quarter, rebounding from the worst contraction since 2008, while doing little to ease concerns about the risks it faces.

Gross domestic product expanded 1.1 per cent from the previous quarter, topping economists' median estimate of a 0.9per cent gain. GDP grew 2.1 per cent from a year earlier, versus a 1.9 per cent estimate. A rebound in facilities investment and a pickup in government spending played key roles.

"The details don't look so good," said Park Seok-gil, an economist at JPMorgan Chase & Co. "It's disappointing that the contributions from private growth are smaller than expected, and facilities investment mostly came from the government."

Park said he doesn't expect the economy to hit the Bank of Korea's 2.2 per cent growth forecast for this year.

Despite the second-quarter rebound, there are few signs of strength in the economy. Just last week the central bank lowered its key interest rate and again cut its 2019 growth forecast, this time to 2.2 per cent from 2.5 per cent, citing risks such as the US-China trade war and rising tensions with Japan. Exports look set for an eighth straight monthly decline in July, also due to a slumping demand and prices for semiconductors, a key growth driver for South Korea.

BOK Governor Lee Ju-yeol said this week that central bank may have to act again if the economic situation worsens. The latest growth data may cool speculation that any such action will come at the next BOK meeting.

"Had the growth come out at under 1per cent, it would have sparked talk about a rate cut at the next Bank of Korea meeting," said Oh Jae-young, an economist at KB Securities. "But it seems like the 2.2 per cent annual growth forecast by the BOK isn't impossible after all."

JAPAN DISPUTE

Things could still get worse. Japan has placed restrictions on exports to South Korea of three materials vital to semiconductor and display manufacturing, and may yet remove South Korea from its "white list" of trusted export destinations. Japan accounts for about 32 per cent or roughly US$3.8 billion of South Korea's chip manufacturing equipment imports.

The impact of the trade spat with Japan could be much bigger than tensions between the US and China, and could spill over into other industries, Park Chong-hoon, head of Korea economic research at Standard Chartered Bank, told Bloomberg TV.

If the Japanese restrictions on exports to Korea cause a 10 per cent fall in semiconductor exports that could easily slice 0.2 percentage point off overall economic growth, pushing it below the 2 per cent mark, he said.

Bloomberg's economists said: "The risks to the forecasts are predominantly tilted to the downside. Those include: potential for a renewed breakdown in US-China trade talks, slowing growth in China, weak investment in South Korea and a drag on consumption from the fragile labor market."

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