South Korea Q1 GDP growth smashes estimates, but outlook’s uncertain By Reuters

Written by Cynthia Kim and Jihoon Lee

SEOUL (Reuters) – South Korea's economy grew at its fastest pace in more than two years in the first quarter, beating all estimates with rising domestic consumption and strong exports, but the market questioned whether the recovery was sustainable.

Data from the Bank of Korea showed that gross domestic product for the January-March quarter was 1.3% higher than the previous three months on a seasonally adjusted basis, the largest expansion since the fourth quarter of 2021.

This follows a 0.6% expansion in the previous quarter and compares with the average forecast of 0.6% in a Reuters poll of economists.

Shiva Tandon, an economist at Capital Economics, said domestic demand growth was the main factor behind the stronger-than-expected GDP, pointing to a 0.8% increase in private consumption after a 0.2% increase three months ago.

“The data provide encouraging signs that the worst may be over for consumption in Korea, but with the labor market weak and debt servicing burdens likely to remain high, we are not convinced that today's data represents the beginning of a strong recovery,” he added. In a report.

On an annual basis, Asia's fourth-largest economy grew by 3.4%, compared with a 2.2% gain in the fourth quarter of 2023 and a 2.4% increase that economists had expected.

The central bank said at its latest interest rate decision meeting that there is a possibility that the economy will grow faster in 2024 than its previous forecast of 2.1%. In 2023, the economy grew at a three-year low of 1.4%.

“It is too early to know whether consumption has turned the corner,” a Bank of Korea official said in a press conference after the data was published.

“Growth appears to be stronger than our February forecast, and this will be reflected in the bank's upcoming review of forecasts next month. Geopolitical risks from the Middle East will be reflected, as will foreign exchange and uncertainty over inflation expectations.”

Exports expanded 0.9% from the previous three months, slowing after a 3.5% expansion in the fourth quarter.

Investment in utilities decreased by 0.8% and investment in construction increased by 2.7%. Government spending increased by 0.7%.

While exports grew for a sixth straight month in March, consumer spending in the country was weak with interest rates remaining at high levels for an extended period, raising concerns about an uneven economic recovery.

The Bank of Korea said earlier this month that growing uncertainty over the inflation outlook and strength in exports militated against a near-term push to cut interest rates, as the central bank left interest rates steady at a 15-year high.

Before the GDP data, analysts had expected the BOK to deliver a 25 basis point cut in the third and fourth quarters, bringing the interest rate down to 3.00% by the end of this year from the current 3.50%.

“We stand by our view that the BOK is likely to cut interest rates in July as core inflation declines, but we will watch whether the strong growth data will push the BOK into a more hawkish stance,” said Park Yeon-jung, an analyst at NH Bank. . Investment securities.