South Korean economy likely slowed modestly in Q1 2016

The supply-side indicators released recently indicate that the South Korean economy might have moderately decelerated in the first quarter of 2016, according to DBS Bank. In February, the country’s industrial output grew 3.3% on monthly basis, countering January’s decline of 2.1%. Presuming levels of production remained flat in March, economic contraction on quarter-on-quarter basis can be averted for Q1 2016, added DBS Bank.

“Taking into account the output gains in services and construction sectors, GDP growth is expected to stay at about 2% (QoQ saar) in 1Q16, compared to 2.7% in 4Q15”, notes DBS Bank.

However, key indicators on the demand side worsened remarkably. Retail sales in February fell for the second consecutive month, declining by over 1%, while equipment investment fell noticeably by more than 6% in the first two months. Growth in private consumption is likely to be negative in quarterly terms in the first quarter, while investment growth is expected to be around 0%, says DBS Bank.

Therefore, it appears that inventories will assist in strengthening the GDP growth in Q1. In the first two months of 2016, inventory-to-shipment ration in manufacturing sector grew to 1.28 from Q4 2015’s 1.24. It is uncertain if manufacturers will continue piling inventories and expanding production if the final demand does not recover significantly.

According to DBS Bank, South Korea’s output growth might be weighed on by destocking in the coming months. Below expected slowdown in Q1 GDP might ease the urgency for the Bank of Korea to loose monetary policy that indicates a less likelihood of cutting rates in April, added DBS Bank. However, weak demand is a cause of worry that needs boosting policies.