Korea's GDP growth seen to pick up to 3.5% in 2014

Fiscal policy to remain supportive.

According to DBS, it predicts that Korea's GDP growth will pick up to 3.5% next year from an estimated 2.8% this year.

Here's more from GDP:

The preliminary estimate of the 3Q GDP is due for release this Friday. We expect growth to decelerate to 0.8% QoQ sa from a strong 1.1% in 2Q (consensus: 0.9%).

In the annualized terms, growth in the first three quarters should have averaged 3%, not a bad number compared to the long-term trend of 4%.

Based on the monthly indicators, exports and private consumption should have held up well in 3Q.

The competitiveness of key export products and the diversification of market exposure helped Korean exporters to cope with the intensive challenges this year including Japan’s yen depreciation and China’s slowdown.

Meanwhile, thanks to the strong external position, Korea’s financial markets remained relatively calm in 3Q despite the talk of the US’s QE tapering and capital flight from many other emerging markets.

The stability in the equity and FX markets in turn, lent support to domestic consumer confidence.

The 3Q slowdown should largely come from construction investment and government consumption, as a result of the reduction in fiscal stimulus.

Property market activity fell notably in 3Q as a temporary cut of real estate acquisition tax expired in end-June. Government spending on welfares should have also fallen due to the front-loading of this year’s budget in 1H13.

We think the slowdown is temporary. Fiscal policy will remain supportive of growth next year. Net fiscal balance is expected to remain in a deficit equivalent to 1.8% of GDP in 2014, according to the government’s budget proposal unveiled last month.

In August, the government has also announced a permanent reduction of the real estate acquisition tax, beginning in January 2014.

After all, there is still adequate room for maneuver on fiscal policy, given that the government debt level remains relatively low and public financing is well supported by domestic private savings.