Korea to suffer weak growth starting 2H12

Will the USD7.4bn worth of stimulus measures boost the economy against looming low rates?

According to Nomura, the Ministry of Strategy and Finance (MOSF) cut its 2012 GDP growth forecast from 3.7% to 3.3% and announced KRW8.5trn (USD7.4bn, or 0.7% of GDP) worth of stimulus measures. We believe this will partly offset the negative contribution to GDP growth from fiscal expenditure in H2 after massive front-loading in H1.

Here's more from Nomura:

Also, the global economy should rebound slightly in H2, supported by global monetary easing and the Chinese fiscal stimulus. That said, our revised forecast of 0.1% q-o-q Q2 GDP growth means that the economy is starting H2 from a much weaker position, and as a result we have shaved our quarterly profile in H2.

We now believe Korea‟s sequential GDP growth should rebound to .6% (sa) q-o-q in Q3 and to 0.7% in Q4. This translates to GDP growth of 1.9% y-o-y in Q3 and 2.3% in Q4 – lower than potential GDP growth, which we estimate at about 3.5%.

CPI inflation slowed to 2.2% y-o-y in June, lower than our forecast of 2.5%, as a decline in gasoline and food prices outweighed an cceleration in service prices. In H2, we expect disinflation to continue due to the negative output gap, a one-off decline in school fees and expenses and lower oil prices, which are a major risk factor for future inflation.

As real policy rates (nominal policy rates less headline CPI inflation) urned positive and domestic credit growth slowed, house prices continued to fall modestly. In our view, conditions are becoming conducive for reducing policy rates as this would help reduce debt-servicing costs, but with the fragility of the economy and markets, it is unlikely to trigger another borrowing binge.