South Korea’s economy unexpectedly speeds up

SEOUL    South Korean economic growth unexpectedly picked up in the second quarter as strong consumption on eased COVID-19 restrictions offset poor exports, supporting the case for further central bank interest rate hikes.

The Bank of Korea (BoK) estimated on Tuesday gross domestic product for the April-June period rose 0.7% quarter-on-quarter, faster than the 0.6% growth in the first quarter and above a 0.4% rise tipped in a Reuters survey.

Economists said the upbeat data allowed the central bank, which this month delivered an unprecedented 50 basis-point rate hike, to continue tightening policy in coming months.

“The economy will inevitably slow due to prolonged inflation and cooling exports, but today’s solid readings are a good boost for the central bank seeing inflation as the prime risk for now,” said Chun Kyu-yeon, economist at Hana Financial Investment.

The BoK has raised the policy interest rate by a combined 1.75 percentage points to 2.25% from record-low 0.5% since August last year, with economists predicting rates to be at 2.75% by the end of this year. The bank holds its next policy meeting on Aug. 25.

The strong consumption comes despite the BoK’s aggressive series of interest rate hikes since August last year.

The economy also received a boost from increased government spending after the parliament approved a 62-trillion won ($47.33 billion) supplementary budget weeks after President Yoon Suk-yeol took office in early May.

However, exports and corporate spending on production facilities slumped amid a slowing Chinese economy and the fallout from a war in Ukraine as well as a global wave of monetary policy tightening to fight inflation.

Exports shrank 3.1% in the April-June period from the preceding quarter, the largest decline in two years. Capital investment dropped for a fourth consecutive quarter by 1.0% following a 3.9% contraction in the January-March period.

Asia’s fourth-largest economy grew 2.9% in the second quarter year-on-year, faster than analyst expectations for 2.5% growth but slower than 3.0% growth in the first quarter. — Reuters