South Korea announces stimulus package after disappointing Q2 GDP

SEOUL – South Korea’s Q2 GDP grew 3.6% y/y, lower than both the 3.9% reported in Q1 and market expectations of 3.7%. Private consumption contracted 0.3% q/q in Q2, compared with 0.2% growth in Q1, suggesting that the Sewol ferry accident has dragged domestic consumption. Overall investment declined by 0.1% q/q (Q1: -0.9%), led by a 4.2% decline in intellectual property products.

Responding, the Government announced a stimulus package to lift growth. This will include expansion of fiscal spending by KRW11.7 trillion, with an extra KRW29 trillion to be extended in policy financing.
Commenting on the data, ANZ Bank maintained its forecast that the Korean economy will grow 3.4% in 2014. It is also projecting a modest CPI rise of 1.9% over 2014.
“While we are not convinced that the economic fundamentals have worsened significantly, the lower-than-expected Q2 GDP certainly increases political pressure for the Bank of Korea to cut rates,” ANZ said. “As export data in the first 20 days of July signalled poor shipment flow, upcoming trade data for the whole month will be crucial for us to reassess the policy rate forecast. Overall, latest data points to a policy easing bias. We attach a 50% probability of a rate cut in August.” www.live.anz.com (ATI).