July 25, 2013 4:56 am

South Korea records strongest economic growth in two years

South Korea’s economy recorded its strongest quarterly growth for more than two years in the three months through June, as consumer spending rebounded and the new government boosted state expenditure.

The economy expanded a seasonally adjusted 1.1 per cent in the second quarter from the first three months of the year, the Bank of Korea said on Thursday. That marked its strongest performance since the first quarter of 2011. Compared with the same period a year earlier, gross domestic product grew 2.3 per cent.

“This is a great result, and one that has also come from left field,” said Matthew Circosta, an economist at Moody’s Analytics. “Indicators up to May had suggested slower not faster growth in Korea.”

Weak consumer spending, stuttering industrial production and concerns about the outlook for exports had prompted the government to cut its annual growth forecast from 3 per cent to 2.3 per cent in March.

Then, in May, it announced a supplementary budget of Won17.3tn ($15.5bn). Most of the money was designed to compensate for shortfalls in tax revenue, but it also included measures to create jobs and boost the property market.

Raymond Yeung, an economist at ANZ, said the new administration of President Park Geun-hye helped the economy in the second quarter by introducing tax exemptions in April that sparked a sharp rise in property transactions.

Growth has also been buoyed by central bank intervention. The BoK has cut rates by 25 basis points on three separate occasions since July last year, with the most recent cut coming in May.

The central bank said government spending rose 2.4 per cent from the previous quarter, but this growth is set to abate in the next few months because spending was concentrated in the first half of the year.

Ronald Man, economist at HSBC, said this could weigh on economic growth later this year, adding that the strong second-quarter figure was flattered by comparison with a weak performance in the first quarter.

Construction contributed strongly to the growth, rising 3.3 per cent quarter-on-quarter. However, a decline of 0.7 per cent in facilities investment – particularly transport equipment – reflected fragile business confidence. Private consumption grew 0.6 per cent after a 0.4 per cent fall in the previous quarter, while exports of goods and services increased 1.5 per cent.

The central bank predicts full-year growth of 2.8 per cent, rising to 4 per cent in 2014.

“Stronger second-quarter growth reduces pressure on policy makers to deliver more stimulus measures in Korea,” Mr Man said. “But downside risks will persist in the third quarter, with external demand set to pick up only gradually.”

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