Korea: Economy contracts in Q2 at most dramatic pace in decades
According to preliminary data released by the Bank of Korea, the economy contracted 3.3% in quarter-on-quarter seasonally-adjusted (qoqsa) terms in the second quarter, following the 1.3% contraction in the first quarter of 2020. The reading marked the largest drop in economic activity since Q4 2008, while also coming in below market analysts’ expectations of a 2.3% contraction. Moreover, the economy shrank 2.9% in annual terms in the second quarter, contrasting notably with the 1.3% growth seen in the first quarter of 2020. This print is the lowest Korea has seen in decades.
The dramatic fall was mainly driven by a 16.6% collapse in exports of goods and services quarter-on-quarter, following the previous quarter’s 1.4% decline. Similarly, imports of goods and services contracted 7.4% in the second quarter, larger than the 3.6% shrinkage seen in the first quarter. Gross fixed capital formation also detracted from the overall reading by declining 1.1% in Q2 against the 0.5% mild growth in Q1. Meanwhile, government expenditure growth slowed to 1.0% in Q2 from 1.4% in Q1. Contrasting the deteriorations in the other GDP component metrics, private consumption returned to growth in Q2 with a print of 1.4%, contrasting the contraction of 6.4% in Q1.
Turning to the outlook, in a recent report the Bank of Korea said it expects private consumption to grow in the second half of the year, supported by the measures it has implemented, together with the government’s ongoing fiscal stimulus measures. Exports of goods are set to decline in 2020, severely hit by the decline in foreign demand due to the pandemic, but are expected to recover in H2 as restrictions are gradually lifted worldwide. Nevertheless, the uncertainty of the evolution of the virus makes the economic outlook uncertain.
Providing their perspective on the outlook, analysts at Nomura noted:
“Latest readings of both soft and hard data confirm our view that, following the economic fallout from the pandemic in H1, Korea’s growth momentum should turn positive in H2 2020, supported by the substantial economic policy stimulus already in place […]. Given the significant uncertainties facing the global economy, we maintain our view that domestic demand will play a much greater role in the course of economic recovery in H2 2020. We expect GDP growth to sequentially improve, registering -0.5% y-o-y in 2020. We also expect the BOK to leave its policy rates unchanged but maintain an accommodative monetary policy stance for the rest of this year.”