Korea domestic demand likely to pick up in Q2, support growth: DBS Bank

South Korea’s domestic demand is expected to pick up and support the Q2 growth. This week’s data showed that retail sales increased a solid 0.7 percent m/m (s.a.) in April, up from -0.1 percent in the previous month and well above the 5-year average of 0.2 percent. A stronger rise should be on the way, given the surge in consumer confidence in May and the rally in the stock market to record high.

Private consumption expenditures, which grew just 1.5 percent q/q (saar) in Q1, is expected to bounce back to 2-3 percent in Q2. Admittedly, the sentiment-driven recovery in domestic demand may not be sustainable. Fundamentals remain weak, as job and wage growth has not picked up and the property market is losing momentum. Eyes are on the upcoming fiscal stimulus to be pursued by the new government.

The finance ministry is set to submit a KRW10 trillion supplementary budget to the parliament in June, aimed at creating public sector jobs and improving social welfare. If the budget is approved and implemented within this year, it will help to spur consumption growth in H2 2017 and extend the ongoing recovery in domestic demand.

On the other hand, exports and manufacturing activity appear to be cooling in Q2. Industrial production unexpectedly fell -2.2 percent m/m (s.a.) in April. Exports also missed the consensus forecast, slowing to 13.4 percent y/y in May from 24.1 percent in April. Adjusted by the calendar effects, exports per working day were estimated to be USD2.37 billion, also slightly lower than the USD2.55 billion in April.

"Given that global recovery remains on track and the tech sector is still in an upturn, we are not particularly worried about the exports outlook for the time being and still look for a rebound in H2 2017," DBS Bank commented in its latest research report.