Korean economy grows 0.7% in Q2
Further rate cut on the table amid sluggish employment, investment
By Park Hyung-kiPublished : July 26, 2016 - 16:22
South Korea’s economy grew 0.7 percent in the second quarter of this year, remaining in zero percent growth territory for three straight fiscal quarters, according to the Bank of Korea on Tuesday.
Even though the country’s second-quarter growth exceeded that of the first quarter when Asia’s fourth largest economy expanded merely 0.5 percent, Korea’s economy performed slightly better mostly due to improved domestic consumption backed by government policies.
Other key drivers of growth such as government spending, private investment and exports remained slow, according to BOK data.
Given that the government frontloaded most of its spending in the first quarter, its contribution to growth in the second quarter turned out to be zero percent.
“The government’s fiscal spending was mostly carried out in the first quarter, compared to the second quarter,” said Kim Young-tae of the central bank’s national account.
The central bank still expects the Korean economy will be on track to grow 2.7 percent this year, despite decreasing purchasing power on rising oil prices. The country’s gross domestic income fell 0.4 percent in the second quarter compared to the first quarter of this year. This marks the first time that the gross domestic income has fallen since the first quarter of 2011.
When compared to a year ago, the GDI increased 4.4 percent. However, the quarterly fall suggests that companies are accumulating their earned income rather than distributing their earnings to employees, as indicated by slow private investment.
With lackluster growth beset by slow investment and low employment on a gloomy outlook, analysts say that the central bank can still afford to further ease its monetary policy by slashing its rate another 25 basis points later this year.
“While inflation is heading lower, we think the high youth unemployment rate, tepid domestic data, and market volatility warrant another rate cut this year,” said Park Chong-hoon, the head of research at Standard Chartered Bank Korea, in a report.
“BOK Gov. Lee (Ju-yeol) noted at the June press conference that while interest rates are close to their lower bound, the level of the lower bound is still unclear. We think this suggests further accommodative policy to come.”
The central bank cut its rate to a record low of 1.25 percent in June, and kept it steady early this month to accommodate the government’s planned fiscal stimulus, including an 11 trillion won extra budget for the second half of this year.
The Finance Ministry announced last week its plan to allocate extra spending of 11 trillion won to create 68,000 jobs, amid expectations of increasing youth unemployment following corporate restructuring. However, it will actually be spending around 6 trillion won more as some 5 trillion won will be used for debt payback, corporate restructuring and policy bank recapitalization, as well as to provide regional financing.
By Park Hyong-ki (hkp@heraldcorp.com)
Even though the country’s second-quarter growth exceeded that of the first quarter when Asia’s fourth largest economy expanded merely 0.5 percent, Korea’s economy performed slightly better mostly due to improved domestic consumption backed by government policies.
Other key drivers of growth such as government spending, private investment and exports remained slow, according to BOK data.
Given that the government frontloaded most of its spending in the first quarter, its contribution to growth in the second quarter turned out to be zero percent.
“The government’s fiscal spending was mostly carried out in the first quarter, compared to the second quarter,” said Kim Young-tae of the central bank’s national account.
The central bank still expects the Korean economy will be on track to grow 2.7 percent this year, despite decreasing purchasing power on rising oil prices. The country’s gross domestic income fell 0.4 percent in the second quarter compared to the first quarter of this year. This marks the first time that the gross domestic income has fallen since the first quarter of 2011.
When compared to a year ago, the GDI increased 4.4 percent. However, the quarterly fall suggests that companies are accumulating their earned income rather than distributing their earnings to employees, as indicated by slow private investment.
With lackluster growth beset by slow investment and low employment on a gloomy outlook, analysts say that the central bank can still afford to further ease its monetary policy by slashing its rate another 25 basis points later this year.
“While inflation is heading lower, we think the high youth unemployment rate, tepid domestic data, and market volatility warrant another rate cut this year,” said Park Chong-hoon, the head of research at Standard Chartered Bank Korea, in a report.
“BOK Gov. Lee (Ju-yeol) noted at the June press conference that while interest rates are close to their lower bound, the level of the lower bound is still unclear. We think this suggests further accommodative policy to come.”
The central bank cut its rate to a record low of 1.25 percent in June, and kept it steady early this month to accommodate the government’s planned fiscal stimulus, including an 11 trillion won extra budget for the second half of this year.
The Finance Ministry announced last week its plan to allocate extra spending of 11 trillion won to create 68,000 jobs, amid expectations of increasing youth unemployment following corporate restructuring. However, it will actually be spending around 6 trillion won more as some 5 trillion won will be used for debt payback, corporate restructuring and policy bank recapitalization, as well as to provide regional financing.
By Park Hyong-ki (hkp@heraldcorp.com)
