South Korea's second-quarter growth dips as capital investment, consumption slow

SEOUL (Reuters) - A rapid fall in capital investment slowed South Korea’s economic growth in the second quarter, while weaker export growth highlighted concerns over the outlook for trade in the second half of the year.

FILE PHOTO - Hanjin Shipping's container terminal is seen at the Busan New Port in Busan August 8, 2013. REUTERS/Lee Jae-Won/File Photo

Gross domestic product grew a seasonally adjusted 0.7 percent in the second quarter, the Bank of Korea (BOK) said on Thursday, slowing from 1 percent growth over January to March, as expected. Year-on-year growth logged 2.9 percent, slightly below 3 percent growth seen in a Reuters survey.

Exports, which account for about 43 percent of GDP, grew 0.8 percent in the second quarter after jumping 4.4 percent in the first.

Investment in plant and equipment dropped 6.6 percent, the worst performance since a 7.1 percent fall in the first quarter of 2016 when large-scale investment in manufacturing capacity to produce memory chips and display panels petered out.

“Investment on machines for production of memory chips and display panels is declining. Private consumption also took a hit from a downturn in activity by non-government organizations because the Winter Olympics in PyeongChang are over,” a central bank official said.

Private consumption gained 0.3 percent, logging the slowest growth in six quarters, while construction investment declined 1.3 percent after gaining 1.8 percent a quarter earlier.

Pyeongchang, a mountain county in South Korea’s Gangwon province, hosted the 2018 Winter Olympics in February this year, which fed a boom in consumption and tourism.

Park Sang-hyun, an economist at Leading Investment & Securities, said global trade conflicts could undermine South Korea’s exports in the second half.

“The hostilities between the U.S. and China will affect South Korean exports,” Park said, which would undermine the Bank of Korea’s ability to raise interest rates to match the U.S. Federal Reserve and European Central Bank’s monetary tightening. “An August interest rate hike is unlikely to happen, as it would look like (the BOK) is in discord with the government after the government’s measures to boost the economy. I see a rate hike in the fourth quarter,” Park said.

To revive the job market, which has particularly high levels of youth unemployment, the government this month earmarked up to 4 trillion won of extra fiscal spending within the existing budget to promote growth.

“Assuming our potential growth rate is at 2.7 percent to 2.8 percent, we can see that growth exceeded that in the first quarter and grew at the potential rate in the second quarter, said Park Young-su, director general at the BOK’s Economic Statistics Department.

“We estimate the economy can still grow 2.9 percent this year (as targeted),” Park said.

Exports added 1.3 percentage points to growth in the second quarter, while a fall in the broader domestic consumption category subtracted 0.6 percentage points, resulting in a quarterly expansion of 0.7 percent for the April-June period.

Reporting by Hayoung Choi; Editing by Eric Meijer