Korea's 2012 growth estimate cut further to 2.7%

This is significantly lower than the 3.6% projected in the year beginning, says DBS.

DBS Group Research noted:

After the 2Q GDP reported a weaker than expected 1.5% QoQ saar, we are obliged to cut the growth estimate for the whole year of 2012 to 2.7%, down from 3.1%. This is the 3rd downgrade so far this year, significantly lower than the 3.6% projected in the year beginning. Meanwhile, we also slightly revised down the growth forecast for 2013, from 4.1% to 3.9%.

The slowdown in 2Q was mainly dragged by exports (-2.4%) and investment (-8.8%), obviously a result of the deterioration in overseas demand. The global outlook remains cloudy in the near term. Europe is heading towards a recession, China’s domestic economy is facing a structural slowdown, and growth in the US is weaker than anticipated. External headwinds will continue to weigh on industrial activity in the manufacturing sector.

The Bank of Korea cut rates by 25bps in July. This should help to reduce the debt burdens of domestic mortgage borrowers, and prevent a sharp decline in home prices that could prompt banks to require faster repayment of mortgage loans.

However, as the accumulated debt in the household sector has exceeded 150% of incomes, policymakers would refrain from aggressive easing that reignites concerns about debt overload. Residential property transactions already fell -28% YoY in 1H12. Even if property transactions and home prices bounce back due to lower interest rates, an immediate recovery in the construction sector seems unlikely, as the unsold home levels remain higher than their long term equilibriums.

To prevent a secular slowdown in economic growth in the face of a weaker global environment and domestic challenges such as population aging in the long run, effective policy reforms would be needed. Measures aimed at boosting productivity growth in the services industry and encouraging investment in the sunrise sectors will be particularly helpful. A formulation and implementation of the effective, long term economic strategy may not take place soon, at least until the presidential election concludes in December.

Based on our estimate, the economy’s output gap has turned negative in 2Q12 (-0.2% of GDP), for the first time ever since 4Q09. The output gap will remain negative in the rest of this year. Considering the time lag between output gap and inflation, we also revised down the CPI forecast for 2013 to 2.9% from 3.3%. We continue to expect one more rate cut of 25bps in 2H12, which could come as soon as August.