South Korea – Export-led slowdown in Q3 GDP

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2010-11-02 09:14

SEOUL--(뉴스와이어)--Korea’s GDP growth slowed to 0.7% q/q (3.0% annualised) in Q3-2010 following a strong performance in H1, as widely expected (our forecast was 0.6% q/q). On a y/y basis, growth slowed significantly to 4.5% from 7.2%, partly because of adverse base effects. The moderation in the export and manufacturing sector was the main reason for the growth slowdown, while a pick-up in private consumption growth provided a mild upside surprise. We expect sub-par GDP growth to continue in Q4 (our forecast is 0.5% q/q) due to a continued slowdown in exports and the likely contraction of government consumption following the front-loading of fiscal spending early in the year. We raise our 2010 GDP growth forecast slightly to 6.1% from 6.0%, but we revise down our 2011 forecast to 3.8% from 4.1% to reflect the likely slowdown near the end of this year. GDP growth below 4% would not be supportive of active exit strategies from monetary and fiscal loosening. It would make it difficult for the Bank of Korea (BoK) to tighten monetary policy aggressively, and would increase the chances of further fiscal stimulus (though this is not our base scenario).

The Q3 data showed a clear slowdown in exports and manufacturing, the main drivers of the upside growth surprise in H1. Export growth slowed to 1.8% q/q in Q3 from 7.2% in Q2, and manufacturing production growth eased to 2.0% from 5.2%. The export and manufacturing slowdown probably points to the end of support from the inventory cycle. On the positive side, private consumption growth accelerated to 1.3% q/q from 0.8%; the BoK ascribed this to strong consumption of durable goods such as cars and mobile phones. Government consumption fell 0.6%, following a 0.1% increase in Q2 – a natural consolidation after 5.8% growth in Q1, which was driven by the front-loading of fiscal spending. Sustained strength in facility investment (6.3% q/q in Q3 versus 9.1% in Q2) was led by high-tech manufacturing, while construction investment rebounded to 1.5% growth from a 3.6% decline on increased infrastructure activity.

The growth contribution from inventory investment turned into negative (-0.5ppt) for the first time since Q3-2009, which points to the maturing of inventory replenishment. However, the actual growth contribution from inventories was smaller, as much of the downward inventory adjustment in Q3-2010 came from imported raw materials, according to the BoK. The growth contribution from net exports declined from 0.4ppt to -0.1ppt, further evidence of the slowdown in exports. Breaking down the GDP data by sector, agricultural production fell by 2.0% q/q, probably due to bad weather. The continued slowdown in services-sector growth (0.3% q/q) was partly driven by real estate-related services, and does not bode well for the labour-market recovery.

We expect growth to remain relatively weak in Q4-2010, forecasting 0.5% q/q. Exports and manufacturing production will likely continue to be sluggish as the temporary boost from the global inventory cycle wanes and developed economies (especially the US) show signs of a renewed slowdown. In a sense, we are simply predicting a normalisation of export and manufacturing growth – during the 2005-07 boom period, average q/q growth was around 2% for the manufacturing sector and 3% for exports, which is not so different from the Q3-2010 figures. Government consumption is likely to contract significantly, and this will be a particular drag on Q4 GDP growth. Government consumption tends to contract in Q4 due to the front-loading of fiscal spending – it fell 1.2% in Q4-2005 and 2.4% in Q4-2009. Private consumption is also likely to slow in Q4 after the pick-up seen in Q3. The 5.3% annualised growth rate in Q3 does not look sustainable given the structural burden of a low household savings rate; recent signs of weakness in the labour market and consumer sentiment are also worrisome. It is difficult to expect a meaningful recovery in construction investment given persistent uncertainty about the housing-market outlook.

The expectation of sub-par growth near the end of this year leads us to revise down our 2011 GDP growth forecast to 3.8% from 4.1%. While 2010 growth is likely to exceed 6% (we now forecast 6.1%), we believe 2011 growth is now much more important to the financial-market outlook. While our revised GDP forecast is below 4%, we expect growth to be reasonably resilient on a q/q basis, at 1.0-1.2% (see Table 1). The key assumptions behind our base scenario for 2011 growth are: (1) a sustained export recovery driven by strength in emerging-market economies; (2) a continued recovery in private consumption, led by resilient income growth and sentiment (despite recent signs of a slowdown); (3) the normalisation of fiscal policy after a contraction in spending in 2010; and (4) a mild housing-market recovery, which will boost construction and overall domestic demand.

The GDP growth slowdown in Q3 is unlikely to have an immediate impact on policy, as it was widely anticipated (the official Q3 growth forecast released in July was 0.7% q/q, exactly in line with the actual number). Monthly data, including industrial production and CPI inflation, will play a more important role in the BoK rate decision in November. We maintain our forecast of no rate hike at the November meeting.

However, the increasing possibility of a substantial slowdown in growth in 2011, probably to below 4%, will affect the direction of macroeconomic policy next year. Whether GDP growth is above or below 4% is important to the general public; if growth falls below 4%, the perception is that something is wrong with the Korean economy. The BoK, which forecasts growth of 4.5% for full-year 2011, has said that the y/y rate may fall below 4% in H1. We believe that sub-4% growth would reduce the chance of active exit strategies from monetary and fiscal easing policies. We were already expecting only gradual BoK rate hikes in 2011, forecasting the year-end base rate at 3.0% (versus the current level of 2.25%). An increase in fiscal spending via a supplementary budget in the middle of 2011 cannot be ruled out (although this is not our main scenario). Note that the government’s ‘guideline’ for 2011 GDP growth is still 5%, according to the 2011 budget proposal.

한국스탠다드차타드은행 개요
80년의 역사와 전통을 가진 스탠다드차타드은행은 1929년 조선저축은행으로 출범하여 1958년 제일은행으로 은행명을 변경한 이후 기업금융에 강점을 가진 은행으로 활동해 왔다. 스탠다드차타드의 인수 이후, 2005년 9월 12일 SC제일은행으로 행명을 바꾸고 성공적인 통합 작업을 통해 꾸준한 성장을 해왔다. 2012년 1월 11일 그룹 브랜드와 통합하며 행명을 변경한 스탠다드차타드은행은 ‘고객이 추천하고 싶은 국내 최고의 국제적 은행’이라는 비전을 가지고 고객중심의 조직으로 재편해 기업금융 고객에게는 스탠다드차타드의 글로벌 네트워크를 적극 활용하여 국내와 해외 시장 간의 가교 역할을 하고 있으며, 소매금융 고객에게는 혁신적인 상품 및 차별화된 서비스를 제공함으로써 고객의 니즈를 충족시켜 나가고 있다. 스탠다드차타드은행은 사회적인 책임 의식을 가지고 한국에서 비즈니스 활동을 하는데 전념하고 있으며 스탠다드차타드의 브랜드 약속인 Here for good의 정신 하에 다양한 사회 활동들을 펼치고 있다.

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