Korea's GDP estimate forecast to show economic slowdown

There are increasing risks that the expected recovery will be later or weaker than currently assumed, says DBS.

DBS Group Research noted:

The preliminary GDP estimate for 2Q (due Thursday) is expected to show that the economy has slowed significantly to 2% QoQ saar, down from 3.5% in 1Q. Exports fell to -1.4% YoY in 2Q from 3.0% in 1Q, reflecting the deterioration in global trade as a result of European debt crisis and China’s economic slowdown.

We reckon that the QoQ growth in real exports in the GDP accounts has also turned slightly negative in 2Q. The QoQ investment growth is estimated to be negative too. Equipment investment, which is sensitive to the trade cycle, has fallen to - 10.4% 3M/3M saar as of May. Construction investment was also sluggish, as demand cooled in the property market and the volume of unsold homes remained relatively high compared to the long term equilibrium levels.

The positive contribution to GDP growth should mainly come from consumption. Our annual GDP forecasts of 3.1% for 2012 and 4.1% for 2013 imply a slightly subpar growth in 3Q12, and a recovery to the potential growth from 4Q12 onwards. There are increasing risks that the expected recovery will be later or weaker than currently assumed. So far the leading indicators (business sentiment, machinery orders and construction orders) don’t suggest an immediate pickup in industrial and construction activity in 3Q.

Admittedly, the central bank has shifted to an easing stance to support domestic growth. The Bank of Korea cut rates by 25bps from 3.25% to 3.00% earlier this month. We expect another cut of 25bps within this quarter. Lower rates should help reduce household debt burdens, supporting consumption growth at a relatively stable level.

The BOK, however, faces hurdles to slash rates to below 2.75%. Based on the BOK’s latest economic forecasts announced in July, inflation will stay close to the 3% level, at 2.7% this year and 2.9% in 2013. We are reluctant to forecast aggressive rate cuts. The boosting impact on the domestic economy resulting from moderate rate cuts of 50bps in total is expected to be limited.