South Korean economy unexpectedly shrank in Q2
South Korea’s economy unexpectedly shrank in the second quarter, clocking the sharpest contraction since 2022 as slumping consumer spending undermined an export boom, reinforcing expectations that an interest rate cut could be imminent.
GDP for the April-to-June quarter fell by 0.2 percent from the previous quarter in seasonally adjusted terms, data from the Bank of Korea (BOK) showed, falling short of an 0.1 percent gain estimated by analysts in a Reuters poll.
It was the country’s sharpest quarterly fall since the fourth quarter of 2022.
The performance follows a 1.3 percent expansion seen in the first quarter, the fastest pace since the fourth quarter of 2021 and keeps Asia’s fourth-largest economy on course to hit the bank’s projection of 2.5 percent GDP growth for this year, BOK head of statistics bureau Shin Seung-chul said at a news conference in Seoul.
On an annual basis, Asia’s fourth-largest economy grew by 2.3 percent in the second quarter, compared with a gain of 3.3 percent in the first quarter.
Both private consumption and construction investment declined by 0.2 percent and 1.1 percent from a quarter earlier respectively, while exports increased by 0.9 percent.
The weak data, along with easing consumer price pressures seen last month, increases calls for the BOK to cut interest rates as soon as next month, some analysts say.
The central bank left its key interest rate unchanged at a 15-year high of 3.50 percent this month and flagged the prospect of a policy pivot as price pressures abated.
Capital Economics Ltd said the data suggests domestic demand would only worsen.
“The weakness of the latest GDP figures give us more confidence in our view that interest rate cuts are around the corner,” Capital Economics said in a note. “While we expect the central bank to loosen policy starting from October, the risk of a rate cut in August has risen now.”
However, other analysts say the BOK would not deliver a rate cut until next quarter, choosing instead to wait for the US Federal Reserve to move first. Markets are currently fully pricing in a Fed rate cut in September.
Citigroup Inc economist Kim Jinwook, who expected the economy to contract by 0.3 percent quarteron-quarter, said he still sees the BOK cutting interest rates in October, but that rising home prices pose a hawkish risk to that view.
“On monetary policy, we believe hawkish risk factors from rising housing prices in [the] Seoul area to outweigh dovish risk factors,” he said. “It will take some time for the housing market to stabilize again so an October cut is likely.”