Underlying growth momentum likely to remain steady in Korea, says DBS Bank

South Korea’s first batch of data for May will be out this week, which will provide more information about the second-quarter economic performance. Exports growth is expected to decelerate to 10-15 percent y/y from 24.1 percent in the previous month, which could be inferred from the preliminary figures for the first 20 days.

But this should be attributed to the decline in the number of working days – three public holidays and the election day in May. The underlying growth momentum is likely to remain steady. Despite the recent softening in China’s macro indicators, it remains too early to worry about Korea’s exports outlook, given the increase in G3 demand and the upswing in the electronics cycle.

Moreover, some data suggest that domestic demand is picking up in 2Q. Consumer confidence index soared to 108 in May from 101.2 in April, the highest over three years. The snap election this month has removed political uncertainties and boosted public sentiments. The KOSPI rallied more than 6 percent to hit its record high, which also created positive wealth effects for consumers.

There is a good chance that overall growth will remain solid in Q2. Inflation, on the other hand, is not a big concern. The upward pressures on headline CPI have subsided, thanks to the dissipation of food supply disruptions, stabilisation in oil prices and appreciation of the KRW.

"That said, given the unfavourable base effects, CPI figures will likely stay around 2 percent for the time being. May CPI, due this Thursday, is expected to post 2.0 percent y/y, roughly stable compared to 1.9 percent in the preceding month," DBS Bank commented in its latest research report.