Korea's GDP pegged to hit 3.2%

Will the government adopt expansionary fiscal policy?

According to DBS, the preliminary estimate of 1Q GDP is the focus this week, against the backdrop that China and Singapore both reported a disappointing 1Q GDP earlier this month. 

DBS noted that it estimates that growth in Korea has still risen to 3.2% QoQ saarin 1Q from 1.3% in 4Q12 and the bottom of 0.2% in 3Q12, though lower than the long term trend of 4%.

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While industrial production slipped in Jan-Feb,the PMI survey indicates that production has regained momentum in March. Meanwhile, the all-industry output that closely correlates with GDP outperformed industrial production in Jan-Feb, thanks to support from the services sector.

On the demand side, exports and investment indicators both improved from the preceding quarter, contrary to perceptions that Korea’s export sector has been hit by yen depreciation.

Consumption seems to have slowed, due to cold weather that temporarily dampened outdoor activities and expiration ofthe fiscal stimulus measures rolled outin 2H12 (such as consumption tax cuts on automobiles and electronics).

We expect the QoQ growth momentum to continue accelerating in 2Q-4Q. Accommodative monetary policy and expansionary fiscal policy will lend support to domestic demand in 2H. The government announced a supplementary budget last week, which contains fresh spending of KRW 7.3trn (0.6% GDP).

The central bank also eased credit policy this month, boosting the credit ceiling for a special SME loan program by KRW 3trn. On the external front, the worries about yen depreciation may have been overstated.

Japanese exporters are currently taking the opportunities of a falling yen to recoup the profit losses incurred during the strong yen period in 2008-2012. The adjustmentin export contract prices has not yet begun.

When the price adjustment takes place, the impact on Korean exports should still be limited, asthe won remains far from overvalued versusthe yen and the non-price competitiveness of Korean exports is strong.

The downside risks to exports and the overall economy will mainly come from global demand outlook (US fiscal tightening, uncertainties in Europe, a slower-than-expected recovery in China),rather than the exchange rates.