GDP forecast for Korea slipped to 3%

Blame it on surprising drop in industrial production.

According to DBS, its GDP growth forecast for 2013 is cut to 3.0% from 3.5%, while the 2014 forecast is kept unchanged at 3.9%. The unexpected drop in March industrial production indicates the possibility of a downward revision to 1Q GDP.

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Due to the slide in March, the all-industry outputindex slowed to 0.3%QoQ saarin 1Q, down from 3.6% in 4Q12. We reckon that the 1Q GDP will be revised to the 2.0-3.0% levelfrom 3.5% (QoQ saar) in the preliminary estimate.

The external demand weakness is spilling over into 2Q. Exports rose only 0.4% YoY in April, no improvement from 0.5% in 1Q. A notable recovery in exports would be postponed to 2H. That said, we still expectthe quarterly GDP growth profile to improve from 2Q onwards, aided by domestic demand.

Manufacturing PMI rose 0.6ppt to 52.6 in April, and the survey details showed that new orders and sales growth increased on the back of domestic market demand.

Indeed,the contraction(QoQ)inprivate consumptiondemandin1Qshouldbe a transitory phenomenon. Sales of automobiles and electronics productsfell back after a strong rise in the preceding quarter, due to the end ofthe government’s temporary tax cuts. Going forward, consumption growth is expected to normalize from 2Q onwards and pick up further in 2H.

New stimulus measures will be implemented from June. In the KRW 7.3trn supplementary budget proposed in April, KRW 3.0trn will be allocated to create jobs,stabilize consumer prices and revive the housing market, which should lend support to consumption growth later this year.

Our growth forecast of 3.0% for 2013 currently still stands higher than the BOK’sforecast of 2.6% and the government’s projection of 2.3%. A challenging global economic environment has been anticipated by the authorities and fiscal measures haves been prepared to boost domestic demand to withstand external weakness. We maintain the view that monetary policy will be kept unchanged in the rest ofthis year.

Separately, we also revised down the inflation forecast for 2013 to 1.8% from 2.3%. Inflation in the first four months of this year averaged only 1.4% YoY (1.2% in April), due to the expansion of the government’s welfare subsidy program and the recentslump in global commodity prices.

The actual inflation rate (excluding the distortion of subsidies) is expected to stay in the range of 2.0-2.5% this year, not too different from our original estimate and close to the lower end ofthe BOK’starget band.