Korea's GDP hit 4.4% in 2Q

It's the fastest over 9 quarters.

According to DBS, Korea's real GDP growth registered 4.4% (QoQ saar) in 2Q, the fastest over nine quarters. Domestic demand performed better than expected, with construction investment rising a strong 13.8%, government consumption surging 10.1% and the growth of private consumer spending also bouncing back to 2.5% from-1.7% in the preceding quarter.

Here's more:

Domestic demand is expected to remain solid in the nexttwo quarters on the back ofsupportive fiscal, monetary and property market policies. The acceleration of governmentspending growth in 2Q reflected the frontload of the FY2013 general budget.

The downside risk will mainly come from the export outlook, in our view. Real exports of goods and servicesin the GDP account decelerated to 6.0% in 2Q from 12.4% in 1Q.

Facilities investment fell by -2.9% in the April-June period and inventory destocking has continued. While the latest Eurozone PMI hasfinally returned to the 50 mark and the US economy hasremained in expansionary mode,the further contraction of China’s PMI in July is certainly a concern.

The EU and US accountfor a combined share of 20% in Korea’stotal exports, while China and Hong Kong also contribute a large share of 30%. The average operation ratio of Korean manufacturing firms currently stands at a belowtrend level of 75.4%, and the inventory-to-shipmentratio remains elevated at 1.16.

Softness of export demand and adjustment of excess capacity will likely continue to restrict output and investment growth in the manufacturing industry in the near term.

The Bank of Korea projects 2.8% GDP growth in 2013 and 4.0% in 2014. Thanks to the strong expansion in 2Q, the downside risks and the upside risks to the official GDP forecastfor 2013 now appear more balanced. This has strengthened the case that the BOK will hold ratessteady in the rest of this year.

Regarding the 2014 outlook, we are relatively conservative. Following our downgrade of China’s growth forecastfor next year, we have also trimmed Korea’s 2014 GDP forecastto 3.5% from 4.0%.