06/29/2015
South Korea / GDP
Given the lingering drag from the exports slowdown and the fresh threat of MERS, Korea’s growth outlook seems murky.
Korea will be releasing a slew of economic data this week. The output and purchasing managers’ index (PMI) data will likely show that manufacturing activities continue to contract. A month-on-month decline of minus 0.3% is expected for industrial production in May. The June manufacturing PMI, meanwhile, is expected to register 48-49, staying below the neutral 50 mark for the fourth month in a row.
On the external front, exports should have continued to contract, although the magnitude of decline may have narrowed thanks to the rebound in global commodity prices and the stabilisation in Chinese demand. Inferred from the statistics for the first 20 days, we estimate that exports have fallen to minus 3.7% (on-year) in June, a smaller rate of decline compared to minus 10.9% in May.
Domestic consumption, on the other hand, should have started to deteriorate after the recent outbreak of Middle East Respiratory Syndrome (MERS). This hasn’t been fully reflected in May retail sales data (due this week). The main data capturing the post-MERS domestic economic performance will only be available next month. With the consumer sentiment index reporting a sharp decline of 6 percentage points in June, the deterioration in consumer spending could be more severe than expected.
Given the lingering drag from the exports slowdown and the fresh threat of MERS, the growth outlook is challenging. The central bank cut rates earlier this month and the finance ministry has pledged a stimulus package worth 15 trillion Korean won. The room for rate cuts will narrow going forward as inflation bottoms out and US rates go up. Attention will now be on the details of the government’s supplementary budget, set to be announced by the end of this month.
