South Korean economy likely to grow 2.5% y/y in 2016, 2.4% y/y in 2017

South Korea's Q4 2015 GDP growth slowed to 0.6% in seasonally adjusted terms, according to the advance estimate. The advance estimate is on par with Barclays' forecast for a growth rate of 0.7% and consensus expectation of 0.6% growth. The weakness in growth was mainly due to a slow down on investment, particularly in construction, which reversed sharply, subtracting 0.8pp from growth, as public civil engineering activity eased surprisingly. This worsened the drag from net exports. Overall, with the weaker growth rate of Q4, the South Korean economy expanded 2.6% in 2015.

The services economy, even with stimulus, expanded 0.8% q/q, as compared with the 1% pace in Q3. Manufacturing grew at a faster rate of 0.6%, as compared with the growth of 0.1% in Q3. However, this added more to inventories than to exports, according to the expenditure data.

"Inventory change now has been positive for three straight quarters (Q4: +0.7pp; Q3: +0.2pp; Q2: +0.4pp) and likely will cut into growth in early 2016. Coupled with the weakening external demand conditions, exacerbated by snowstorm-induced disruptions to freight across North Asia and the US, we lower our 2016 GDP growth forecast for 50bp, to 2.5% y/y, and our 2017 forecast 20bp, to 2.4% y/y", says Barclays.

The main factor for a weaker growth in Q4 was investment. Private consumption contributed 0.7pp to Q4 q/q growth, supported by a temporary rebate in consumption tax. Gross fixed capital formation subtracted 0.8pp from growth with additional subtraction of 0.88pp by the slump in construction investment.

The underlying growth momentum is likely to remain weak in early 2016, with cyclical weakness worsened by the effect of the weather-induced disruptions to shipment in North Asia and the US. Monetary policy is likely to remain accommodative in 2016.

"We believe the BoK will deliver another 25bp rate cut in Q1, ahead of the National Assembly elections in April 2016", says Barclays.