Korea growth not all cheery: RBS

Its economy expanded 0.4% qoq in Q411 but exports are at their weakest in years.

Other key growth drivers like facilities investment and private consumption also retreated, RBS said in its Korea emerging markets alert.

In fact, the headline GDP number would have looked far worse if companies didn't amp up their domestic stock piling to offset the fall in external demand.

Here's more from RBS:

According to preliminary estimates, Korea's economy expanded by 0.4% qoq, sa in 2011Q4 (Table 1). The headline number is not too bad, but the composition of growth is far from reassuring. In short, the economy continued to produce as external and domestic demand contracted. Two images come to mind: Korean producers holding their breath until global growth recovers or Korean producers running in the air, before realizing they went over a cliff. In our baseline projection, we don't see the global economy go into recession, but continue on its painfully slow recovery path—a view supported by recent data releases. Therefore, as of now 'holding breath' seems a more appropriate description of the Korean economy.

Exports contracted by 1.5% qoq, sa in Q4, the first quarterly contraction in 2 years, weighed down mainly by Europe and Japan. This lead to an even bigger import contraction of 3.1% qoq, sa, as consumers and investors took flight, and resulted in a 0.6 percentage point growth contribution of net exports.

Consumption contracted by 0.7% qoq, sa, in Q4 with private consumption down 0.4% and government consumption down 1.7%. 2011Q4 marks the first contraction in private consumption since the dark days of 2009Q1.

Fixed investment contracted by 2.1% qoq, sa. Construction investment was down 0.3% qoq, sa, after expanding for the previous two quarters. Facilities investment contracted by a whopping 5.2% qoq, sa—again, the largest contraction since 2009Q1. Companies continued to produce in the face of weaker demand and so stock-building helped overall investment grow at 0.3%. Stock-building contributed 0.6 percentage points to growth and was a key reason the headline growth number didn't look worse. The flipside is that stocks reached a post-crisis high and could subtract from growth going forward.

The second reason why the headline number didn't look worse was demand switching. You may wonder how Korean output could expand at all, when the sum of consumption, investment (including stock-building) and exports contracted. The answer is demand switching, namely Korean consumers and investors switching from imports to domestically produced goods. In Q4 the won dropped by 5.5% in USD terms and 4.5% in nominal effective terms on average. This made domestically produced goods more competitive and lead to a larger share of overall demand being directed towards domestic production.

To conclude, the Q4 GDP reading was not reassuring. But, recent data releases at the global level give credence to our baseline scenario in which Europe's recession will be mild and the world avoids a recession altogether. In this scenario, Korea should grow at 3.5% in 2012 and see neither rate cuts, nor hikes.