Tuesday, July 24, 2007

Q2 GDP Growth

From the Financial Times:

Strong exports boost S Korea GDP Growth

The South Korean economy expanded at a much faster rate than expected in the second quarter, growing by 4.9 per cent compared to a year earlier, increasing the likelihood of further interest rate rises.

The acceleration – from an annual rate of 4 per cent in the first quarter – was largely due to robust exports and capital investment, according to preliminary date from the Bank of Korea released on Wednesday.

“Today’s data strengthens the case for another rate hike by the Bank of Korea, taking the benchmark rate to 5 per cent from 4.75 per cent currently,” said Frederic Neumann, Korea economist at HSBC.

“Even if there are few evident inflationary pressures, policy-makers continue to be concerned over loan growth and the strong output figure should lessen concerns that tighter monetary policy would derail the recovery,” he said.

Earlier this month the central bank raised interest rates for the first time in 10 months, citing inflationary pressure and abundant liquidity in Asia’s third largest economy.

The Bank of Korea data showed the quarterly rate of gross domestic product growth accelerated from 0.9 per cent in the first three months of the year to 1.7 per cent in the latest period, the fastest rate in 18 months. It was much higher than the 1.3 per cent consensus forecast of economists polled by Reuters.

The benchmark Kospi index, which briefly crossed the 2,000 mark on Tuesday to hit a record high, declined 1.12 per cent, to 1,969, when the Seoul stock market opened on Wednesday morning, largely due to profit-taking.

The Korean won, which was trading near a seven month high on Tuesday, also weakened slightly, trading at Won914.65 to the US dollar.

The GDP increase was due to strong growth in exports – they were 5.2 per cent higher in the second quarter, almost double the rate of the previous three months – and the sound performance of the service sector, which grew by 1.1 per cent, only slightly slower than the 1.2 per cent expansion in the preceding three months.

“The second-quarter growth was marginally higher than our expectations, and the economy seems to have reached the upper end of the bank’s target range of growth,” said Lee Kwang-june, director of the central bank’s economic statistics division.

“In the third quarter, the economy will continue to expand, but the quarterly growth is not likely to be as high as 1.7 per cent,” he told reporters.

The central bank and the government this month raised growth forecasts for this year to 4.5 per cent and 4.6 per cent respectively, and with the Bank of Korea operating a conservative monetary policy, further rate rises are expected.

However, some economists have warned this could choke off the nascent recovery. The economy remains in a fragile position, with the strong Korean currency – the won has gained 1.2 per cent against the dollar and 3.3 per cent against the Japanese yen so far this year – continuing to hurt exporters. Meanwhile, the domestic recovery has yet to get properly under way.

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