South Korea GDP shrinks most since 2008 in Q1 on weak capex, exports

26, Apr. 2019

SEOUL, NNA – South Korea’s economy unexpectedly shrank for the first time in more than a year in the January-March quarter, hit by a sharp drop in business investment and continued weak exports amid the U.S.-China trade row.

It was the export-dependent economy’s worst performance since it tanked 3.3 percent in the final quarter of 2008 in the wake of the global financial crisis.

The Bank of Korea released the latest quarterly gross domestic product data on Thursday.

Key points:

―― South Korea’s GDP contracted 0.3 percent quarter-on-quarter in the first three months of the year following 1.0 percent growth in previous quarter, coming in much weaker than the consensus call for 0.3 percent expansion.

―― The decrease was led by a 10.8-percent slump in business investment in equipment, notably machinery and automobiles. It was also due to a 2.6-percent drop in exports, led by lower global demand for memory chips. Exports marked the second straight quarterly drop after a 1.5 percent fall in Q4.

―― It was the first contraction in total domestic output since the final quarter of 2017, when the economy shrank 0.2 percent, due to a plunge in exports and weak capex.

―― Overall fixed capital investment fell 2.8 percent, the third drop in the past four quarters. Construction investment dipped 0.1 percent, mainly due to slower demand for residential buildings and civil engineering.

―― On the upside, private consumption rose 0.1 percent, supported by spending on home appliances. Government consumption grew 0.3 percent, due to increased health care benefits.

Takeaway:

―― The surprise contraction in Q1 GDP is expected to convince market participants that the central bank will shift to an easing stance and possibly cut interest rates to counter growing downside risks.

―― The South Korean economy made a slow start to 2019, but it is still uncertain whether policymakers will have to lower their growth forecasts further, given the government’s plans to provide fiscal stimulus. Last week, the bank revised down its growth forecast for this year to 2.5 percent from 2.6 percent projected three months ago, on moderating consumption and slower exports.