After a weak finish to 2014, Korean real GDP growth picked up in the first quarter, coming in at a better-than- expected annualized pace of 3.1 percent. The export picture is still a problem, but domestic spending is OK.
After a soft finish to 2014, the Korean economy bounced back with an annualized growth rate of 3.1 percent in the first quarter of 2015. The gain is largely a reflection of an about-face in fixed investment spending. In the final quarter of 2014, investment spending contracted at an annualized rate of 10.9 percent, but outlays snapped back in the first quarter, rising at a 17.4 percent clip and adding 4.7 percentage points to the headline number.
Building on the increases in the second half of last year, consumer spending increased at a 3.2 percent rate in the first quarter. Personal consumption accounted for a 1.5 percent contribution to the headline figure.
The surge in both personal expenditures and fixed investment spending was enough to offset drags from a slower pace of inventory accumulation, which subtracted 3.9 percentage points from the headline figure and net exports, which was a 1.0 percentage point drag. In each of the first three months of the year, exports have been in negative territory on a year-over-year basis. Like many currencies, the Korean won has lost value against the U.S. dollar, but it has gained ground against other Asian currencies.
Compared to the Japanese yen, for example, the won was roughly 20 percent higher in the first quarter than it was at its 2014 low. That currency dynamic combined with lackluster growth in China (Korea’s largest trade partner) has made a difficult environment for export growth. On the other side of the trade picture, imports have been gradually increasing. As growth in consumer demand has remained solid, imports have grown in three of the past four quarters, and with consumer confidence in Korea rising to a six-month high in April, there is momentum going into the second quarter.
As is the case all over the world, the oil shock and lower price environment for other commodities is exerting downward pressure on CPI inflation in Korea, which presently stands at just 0.4 percent on a year-over-year basis. The Bank of Korea cut its official bank rate twice last year and again at its March meeting. Another rate cut this year could help spur price growth, while at the same time helping maintain the momentum in consumer
spending by making financing even more affordable.
The current official rate of 1.75 percent, while low by historical standards, is still high compared to many foreign central banks. A lower bank rate could help fight disinflation and partially diminish demand for won-denominated assets. Even so, considering Korea’s substantial current account surplus, we expect any weakness in the won would be quite modest even if the central bank cuts rates again.
Domestic Spending Fuels Growth
After a soft finish to 2014, the Korean economy bounced back with an annualized growth rate of 3.1 percent in the first quarter of 2015. The gain is largely a reflection of an about-face in fixed investment spending. In the final quarter of 2014, investment spending contracted at an annualized rate of 10.9 percent, but outlays snapped back in the first quarter, rising at a 17.4 percent clip and adding 4.7 percentage points to the headline number.
Building on the increases in the second half of last year, consumer spending increased at a 3.2 percent rate in the first quarter. Personal consumption accounted for a 1.5 percent contribution to the headline figure.
The surge in both personal expenditures and fixed investment spending was enough to offset drags from a slower pace of inventory accumulation, which subtracted 3.9 percentage points from the headline figure and net exports, which was a 1.0 percentage point drag. In each of the first three months of the year, exports have been in negative territory on a year-over-year basis. Like many currencies, the Korean won has lost value against the U.S. dollar, but it has gained ground against other Asian currencies.
Compared to the Japanese yen, for example, the won was roughly 20 percent higher in the first quarter than it was at its 2014 low. That currency dynamic combined with lackluster growth in China (Korea’s largest trade partner) has made a difficult environment for export growth. On the other side of the trade picture, imports have been gradually increasing. As growth in consumer demand has remained solid, imports have grown in three of the past four quarters, and with consumer confidence in Korea rising to a six-month high in April, there is momentum going into the second quarter.
No Time for Complacency
As is the case all over the world, the oil shock and lower price environment for other commodities is exerting downward pressure on CPI inflation in Korea, which presently stands at just 0.4 percent on a year-over-year basis. The Bank of Korea cut its official bank rate twice last year and again at its March meeting. Another rate cut this year could help spur price growth, while at the same time helping maintain the momentum in consumer
spending by making financing even more affordable.
The current official rate of 1.75 percent, while low by historical standards, is still high compared to many foreign central banks. A lower bank rate could help fight disinflation and partially diminish demand for won-denominated assets. Even so, considering Korea’s substantial current account surplus, we expect any weakness in the won would be quite modest even if the central bank cuts rates again.
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