Economic Analysis - Downgrading Growth Amid Domestic Difficulties - APR 2017

BMI View: Real GDP growth in South Korea came in at 2.7% in 2016, slightly higher than our forecast of 2.6%. External demand is likely to remain weak due to the slowdown in the Chinese economy, while political uncertainty will also weigh on the government's ability to pass bills related to the restructuring of the labour market and revitalisation of the economy. We have thus downgraded our 2017 real GDP forecast to 2.6%, from 2.8% previously amid continued domestic and external headwinds.

South Korea's economy grew by a seasonally-adjusted 0.4% quarter-on-quarter (q-o-q) in Q416, continuing the slowdown from the 0.6% recorded in the previous quarter. On a y-o-y basis, the real economy expanded by 2.3% in the last quarter of the year. This brought full-year 2016 growth to 2.7%, slightly higher than our forecast of 2.6%. Despite the slightly better than expected figure, we have downgraded our 2017 real GDP forecast to 2.6%, from 2.8% previously, to reflect external and domestic challenges. We expect external demand to face continued uncertainties due to the Trump administration's increasingly protectionist trade stance, and believe that the Chinese economic slowdown will continue to weigh on Korean exports. Domestically, political uncertainty following the impeachment of President Park Geun-hye by parliament will continue to hinder policy making and the passing of bills aimed at restructuring the labour market. Persistently high levels of youth unemployment will also undermine the government's efforts to boost growth by increasing domestic spending.

From the production side, manufacturing expanded by 1.8% q-o-q in Q416, reversing the previous quarter's contraction of 0.9% q-o-q. This was due to an expansion in electronic equipment and we believe this reflects the pick up in the global tech cycle. All the other sectors performed poorly, with agriculture remaining in contraction for the third consecutive quarter (coming in at -2.8% q-o-q). Both construction and services also grew at a slower rate (0.5% q-o-q and 0.0% q-o-q, respectively). From the expenditure side, exports moved into contraction, falling by 0.1% q-o-q, reversing the 0.6% growth in the previous quarter. Private consumption also grew at a considerably slower rate in Q416, expanding by 0.2% q-o-q, versus 0.8% in Q316.

Trending Lower
South Korea - Real GDP By Expenditure Breakdown, % chg q-o-q
Source: BMI, B oK

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