South Korean economy bounces back in Q1 on exports, government spending

Stock market monitor

April 26, 2018 - South Korea's economy bounced back last quarter, buoyed by booming exports of data memory chips and a boost from government spending, although private consumption was sluggish.

Thursday's Bank of Korea GDP report showed the economy expanded 1.1 per cent in the first quarter, rebounding after contracting by 0.2 per cent in the fourth quarter and beating the one per cent forecast in a Reuters poll.

Export volumes, particularly for memory chips and other IT products, gained 4.4 per cent and added to growth.

Samsung Electronics, South Korea's world-leading tech exporter, posted a record quarterly profit of 11.6 trillion South Korean won (S$14.27 billion) on Thursday thanks to booming sales of semiconductors used in servers.

The chip boom has offset soft domestic demand and the blow to tourism from diplomatic tensions with China over South Korea's installation of a US Thaad missile defence system.

Private consumption, which accounts for about half of GDP, marked its slowest growth in a year, gaining a mere 0.6 per cent from the previous quarter.

The service sector grew 0.9 per cent quarter-on-quarter, but output of food and lodging services declined 0.9 per cent even as South Korea hosted the Winter Olympics in PyeongChang in February-March.

"The food and lodging sector is still suffering from fewer Chinese tourists as part of the Thaad backlash," said Chung Kyu Il, a director general at the Bank of Korea.

"People also went out less due to the cold wave and fine dust issues," Mr Chung said.

Mr Chung said 4.1 per cent growth in service sector output from 'cultural activities' reflects a boost from the Winter Olympics, reversing the service sector's 1.8 per cent fall in the fourth quarter.

In annual terms, GDP rose 2.8 per cent in the first quarter, on par with a 2.8 per cent rise in the fourth quarter.

Government spending rose 2.5 per cent and posted the fastest quarterly gain in six years, thanks to higher spending on healthcare.

"The expanded medical benefits boosted government spending, while surging shipments of memory chips are still supporting exports," a Bank of Korea official said.

Park Chong Hoon, an economist at Standard Chartered Bank of Korea, says domestic demand will recover in the second half.

"Exports will continue to lead growth. An increase in the minimum wage will kick in slowly and we could probably see household spending picking up in the second half," Mr Park said.

Even with 17 months of uninterrupted export growth through March, policymakers are navigating the competing concerns of weak domestic consumption and household debt at about 190 per cent of disposable income.

With youth unemployment still hovering near record levels at 11.6 per cent, scarce jobs and the consequent downward pressure on wages have held back domestic demand.

A 3.9 trillion won government bill proposed to support firms that hire young workers has yet to be approved by the National Assembly.

The central bank expects the economy to expand 3 per cent this year, but that estimate is subject to global demand for South Korean memory chips and other manufactured goods in the face of a feared trade war between the United States and China and its potential fallout.

Source: The Strait Times