South Korea's economy grew faster than expected in the second quarter but much of it was due to stimulus spending and the central bank is likely to remain cautious about raising rates anytime soon. Underlining officials' concerns over the strength of the recovery, the government announced it was releasing early $9 billion of fiscal stimulus spending originally earmarked for the last three months of the year.
"The second-quarter growth is quite impressive but the recovery is still nascent," said Park Sang-hyun, an economist at HI Investment & Securities. Speaking after data showed second-quarter growth was revised up to 2.6 percent from 2.3 percent, a central bank official said the economy was still expected to contract 1.6 percent in 2009 as predicted in July.
"We don't see a reason to change our yearly growth forecast for now given the economic conditions in recent months," Jung Yung-taek, head of the national income team at the Bank of Korea, told reporters. Most analysts predict the central bank will start increasing rates from a record low of 2.0 percent in the first quarter of 2010, although some expect it could come as early as November, according to the latest Reuters poll.
Central bank governor Lee Seong-tae said last month he would not consider any rate change until seeing third quarter GDP data, which will be available for November's monthly rate meeting. "The central bank would likely consider raising rates if the third quarter sees sustainable growth more than 1.5 percent. But the July industrial output and August export figures suggest some weakness," said Park at HI Investment & Securities.
Industrial output posted its first annual rise in 10 months in July, but in a sign of weakness corporate investment and consumer goods sales fell from June. Exports dropped at a double digit pace last month from a year earlier while export value per working day fell for a second month. The government has said third quarter growth would slow to around 1 percent as the effect of fiscal stimulus fades.
Asia'a fourth largest economy grew its biggest in 5-1/2 years between April and June, up a seasonally adjusted 2.6 percent from the previous quarter and following a revised 0.1 percent gain in the first quarter and a 5.1 percent contraction in the last quarter of 2008, central bank data showed. Private consumption rose a seasonally adjusted 3.6 percent from the previous quarter, accelerating from just 0.4 percent gain in the first quarter.
Corporate investment reversed its trend with 10.1 percent growth from a 11.2 percent decline. The government did not say how much of the growth was driven by fiscal spending although it had estimated that 1.5 percentage points of the previously seen 2.3 percent expansion was due to stimulus. Finance Ministry economic policy division director, Yoon Jong-won, told reporters the government had already used up 5 trillion won ($4 billion) over the past two month slated for the fourth quarter. That leaves 5-7 trillion won in advance spending for this month.
The government is front-loading the stimulus spending because it believes global economic conditions will improve in the final months of the year, he added. The amount it is spending - pushing the fiscal deficit this year to 5 percent of GDP - means fiscal balance will be achieved by 2013 or 2014, later than the originally targeted 2012, Yoon said.
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