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Same-Day Analysis
South Korea Sees Strong, Broad-Based Growth in Q2
Published: 7/27/2010
IHS Global Insight Perspective | |
Significance | Rather than suffering a downward correction to previously rapid growth rates, South Korea is continuing the trend after again posting solid gains in the second quarter. |
Implications | The combination of strong productivity growth and competitive products on world markets suggests that South Korea can continue to generate solid growth even if its trading partners slow down. |
Outlook | Even if growth rates decelerate in the second half, South Korea should see a 2010 growth rate of well over 6%. |
The initial estimate of South Korea's national income accounts showed strong growth in the second quarter: real GDP (seasonally adjusted) rose at an annualised growth rate of 6.0% quarter-on-quarter, yielding a year-on-year growth rate of over 7%. The strong second-quarter performance once again demonstrates South Korea's ability to generate rapid growth even as the rest of the world worries about a global slowdown.
Sectoral Breakdown
The largest gain among the components of GDP occurred in exports, which grew at a rate of 30% and over. However, imports also grew at nearly the same rate, so net exports made only a small contribution to overall growth. The rise in imports makes sense in light of the gains in domestic demand. For one, inventories increased as firms replenished their supply of raw materials, which also showed their confidence in near-term business conditions. Private consumption also grew, at a faster pace than the two previous quarters, showing not just the impact of fiscal incentives but perhaps a permanent shift in household preferences toward higher spending. Lastly, capital expenditures increased substantially. This not only contributed directly to second-quarter growth, but will also enhance the level of productivity and underpin future growth. The one sector that underperformed was investment in structures: the housing sector—which responded well to government incentives in the second half of last year—now appears to be following the downtrend of other countries.
Outlook and Implications
It was widely believed that South Korea's growth would decelerate sharply in the second quarter: exports were believed susceptible to sluggish income growth overseas, and domestic spending was expected to moderate. Instead the opposite happened, with good performance across all sectors. This does not mean that South Korea has tamed the business cycle, but it does raise the question of whether there will be any correction to the country's growth in the near term. Certainly, exports have seemed to defy gravity—they have increased consistently even as South Korea's trading partners experience slower growth—demonstrating the high value-added nature of Korean manufactured goods and firms' improvements in quality and efficiency. Although there will eventually come a "day of reckoning" in which higher labour costs and slower productivity growth have a negative impact on South Korea's exports, that day appears a long way off. The same applies for capital investment, which largely supports manufacturing firms' expansion and cost-cutting. More questionable is consumption spending: although households have embraced personal spending over the past year, the ending of fiscal incentives (and perhaps running out of wall space for flat-screen TVs) will likely lead to a deceleration. To summarise: potential negative effects should slow growth at some point, although the exact date has become increasingly difficult to determine. Even if the third quarter proves to be slow, it will more than likely be followed by an upward correction in the subsequent quarter, since South Korea's underlying potential growth rate will remain very high compared to most countries.Most Viewed Articles
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