Korea’s GDP growth may have eased to 2.3% in 3Q11

Real GDP growth is expected to have slowed moderately to 2.3% QoQ saar (0.6% not annualized) from 3.6% (0.9%) in the preceding quarter. On the supply side, industrial production growth would turn negative on the QoQ basis in 3Q only if assuming a growth of less than 1.3% MoM sa in September (-1.9% reported in August).

Services output will most likely maintain positive and solid growth in 3Q as it has experienced two-month of above-trend growth in July and August. The services sector is traditionally less vulnerable than manufacturing to external slowdown due to its higher dependence on domestic demand. As such, unless the construction sector output falls deeply in 3Q, the odds of GDP growth staying in the positive territory should be high and the recession worries can be alleviated.

From the demand side perspective, the growth slowdown in 3Q should have been mainly caused by a decline in investment, as business sentiment has deteriorated sharply in the manufacturing sector in light of heightened worries about global recession. Whereas manufacturers have pre-emptively scaled back capital spending in anticipation of weaker export demand ahead, actual export growth in fact has remained stable in 3Q. Private consumption growth also appeared strong thanks to a buoyant labour market.

The third quarter probably can be seen as a bottom in the current cycle. Growth is expected to rebound in 4Q on the back of a recovery in business/investor sentiment and lessened volatility in global financial market. Going forward into 2012, growth is likely to remain subpar however.

Uncertainties will continue to linger in the global economy (public debt overhang in the developed economies, hard landing concerns in China) and weigh on Korea's exports and investment performance.

Domestically, although 2012 is an election year, the government is not preparing ambitious fiscal stimulus based on the budget proposal unveiled. The target of protecting the medium-termfiscal sustainability outweighs that of boosting the near-term economic growth.

Meanwhile, the financial and monetary authorities would be inclined to keep a lid on household debt in accordance with the policy aim of ensuring financial stability - a priority after the 2008 financial crisis. We currently forecast 2011-2012 GDP growth of 3.8% and 4.1% respectively. The downside risks to our forecasts are higher than the upside risks.