South Korea Q2 GDP likely to fall to 1.5 pct q/q owing to inventory destocking, says DBS Bank

The second quarter GDP (preliminary) is due this Thursday. Growth is expected to fall to 1.5 percent q/q (saar) after rising a strong 4.3 percent at the beginning quarter of this year. In the y/y terms, growth is also likely to show a notable slowdown to 2.4 percent from 2.9 percent. Inventory destocking could be a drag on Q2 GDP.

All-industry output, which captures activities in the manufacturing, services and construction sectors, declined consecutively by -1.0 percent m/m (sa) in April and -0.3 percent in May. Even assuming a strong 2 percent rebound in June, total output will slow sharply to 0.8 percent q/q (saar) in Q2, down from 5.6 percent in Q1. Net exports could be another drag. Adjusted by the prices factors, exports are estimated to grow 7.4 percent y/y in Q2, well outpaced by imports growth of 10.4 percent.

Both factors should be technical and temporary. The expansion in imports was reflective of the strength in domestic demand. Investment should have maintained solid growth in Q2, as evidenced by the gains in equipment investment index and core machine orders. The rebound in retail sales and consumer confidence also suggests that private consumption has picked up last quarter.

So long as the demand-side conditions (consumption, investment, exports) continue to improve, inventory restocking should kick in and output growth will catch up. All in, the economy should remain on track for recovery despite the temporary slowdown in Q2.

"Expect growth momentum to remain supported in 2H17-2018, on the back of an improvement in global demand (especially tech demand) and a partial realization of the government’s fiscal stimulus plan (e.g., supplementary budget, minimum wage hike)," DBS Bank reported.

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