South Korea: A six-year high GDP growth in 3Q17 – ING

Prakash Sakpal, Economist at ING, suggests that South korea’s growth looks good for now, but they have concerns about its sustainability.

Key Quotes

“In a big upside surprise, GDP growth accelerated to 3.6% YoY/1.4% QoQ SA in 3Q17 from 2.7%/0.6% in 2Q (consensus: 3.0%/0.9%). We were above consensus at 3.2%/1.1%. It’s the fastest year-over-year pace since 2011, thanks to strong fixed investment and export on the expenditure-side and manufacturing on the industry-side. Fixed investment contributed 2.8ppt and manufacturing 1.8ppt to the headline 3.6% growth.”

“We worry that investment growth could take capacity further than it needs to grow and this could restrain growth in the coming quarters. Industrial statistics suggest that Korean capacity has grown faster than production, which may keep business investment subdued over the end of 2017 and through 2018. Certainly, the export picture looks extremely encouraging right now, but it seems to be at least partly a product replacement-cycle story, and we have some concerns about exports after the year-end. Minimum wages rises may provide some offsetting boost to consumer spending and the domestic economy in 2018.”

“Assuming GDP growth in the last quarter of the year comes in at 3.2%, the Bank of Korea’s forecast for the second half of the year, the full-year growth will still be higher at 3.2% than the BoK’s 3.0% forecast (cons: 2.9%, 2016: 2.7%). With accelerating GDP growth and inflation it is not surprising that some members of the BoK’s MPC see the conditions for tightening beginning to develop. But the conflicting cues mean that we are taking our time over any change to our 3Q18 first rate hike forecast.”