Korea's economy predicted to slowdown in 2Q

2.8% GDP forecast has been penciled in.

According to DBS, the second quarter GDP of Korea (preliminary estimate) will be released this Thursday. Headline growth is expected to moderate to 2.8% QoQ saar from 3.4% in the preceding quarter.

DBS expects the slowdown to mainly come from equipment investment and inventory, due to adjustment of excess capacity in the manufacturing industry and weaknessin business sentiment.

Here's more:

So far the Korean economy has been managing the externalrisks of JPY depreciation and US QE tapering relatively well. Exports to Japan contracted -13.5%YoY in 2Q, cutting the overall export growth by a modest 0.8ppt.

Demand from the non-Japan markets including the US (9.0% YoY in 2Q) and China (12.6%YoY) has continued to grow strongly, however, demonstrating the competitiveness of Korean export products.

The market talk of US QE tapering has resulted in a rise in the long-term bond yields in Korea and foreign outflowsfrom its equity market.

That said,the USD liquidity and KRW liquidity have both remained ample in the financial system, thanks to a strong current account surplus and a loose domestic monetary policy. The short-term interbank rates, bank lending rates and loan growth rate have remained stable in April-June.

In response to the challenging global environment, the government has timely announced a stimulus package in April including theKRW7.3trn supplementary budget and deregulation measures in the property market.

Consumer sentiment has been boosted and the property market activity hasstarted to recover.

The volume of apartmenttransactionssurged strongly by 58% YoY in 2Q. Ahead, a major risk to the growth outlook would be a slowdown in the Chinese economy amid its government’s push for structural reforms and austerity programs.

Inevitably, a slowdown in China will have some negative impact on
the Korean economy via the trade channel. We currently project 2.8% growth in Korea this year and 4.0% next year. The risks to our 2014 forecast are tilted towards the downside.