Korea’s GDP grows 3.4% in 3Q11

Coming in for a soft landing

Encouraging news today. Korea's GDP growth gently moderated over the third quarter and is coming in for a soft landing. Exports were the biggest winners, with shipments supported by a resilient Chinese economy and weak Won.

Looking into the fourth quarter, we expect growth to continue gently easing. For the Bank of Korea, there is no need to cut their Policy Rate and we expect the next move to be a 25bp hike in 1Q 2012.

Facts
Korea's GDP grew by 0.7% on q-o-q sa basis, in line with our expectations, gently easing from 0.9% in the second quarter. In annualised terms, this translated into a 3.4% y-o-y pace of growth.

Exports growth was strong at 2.0% q-o-q sa, accelerating from 1.2% in 2Q. Meanwhile, imports grew at a slightly lower rate of 1.8%.

Domestic demand growth has come down smoothly. On a q-o-q sa basis, private consumption grew 0.7% compared to 0.9% in 2Q. Capital investment took a slightly larger dip, growing by 1.3% vs. 2.3% in the previous quarter.

Implications
Today's GDP figures suggest that the floor will not fall out from September's Industrial Production, Services and Leading Index figures, due to come out next Monday (31 October).

Strong export data supports our view that despite jittery financial conditions in Western conomies, Korean shipments will continue to receive support from resilient Chinese growth and a weak Won.

Domestic consumption was driven by sustained credit growth in Korea. On a y-o-y basis, loans of commercial and specialised banks continued to climb, increasing from 5.4% in 2Q 2011 to an estimated 6.0% in the third quarter. Looking into the fourth quarter, credit growth is expected to moderate. The latest Bank of Korea survey on Bank Lending Practices points to tighter credit availabilities to households and SMEs, which in turn, will likely hold back consumption and investment.

The relatively sharp fall in capital investment partly reflects Korean firms reducing excess stocks, given the rise in the inventories to shipments ratio. We expect this decline to moderate in the fourth quarter as stock levels stabilise.

For the Bank of Korea, today's reading shows that the economy remains on track for a soft, not hard, landing. Strong exports growth in the third quarter has shown that external demand for  Korean goods remains strong whilst domestic demand is still firm. This should dampen any support for a rate cut. October's CPI data comes out next Tuesday (1 November), which is likely to show core inflation remaining sticky at around 4%, so adding further support to our long standing view that the next move is up, and not down.

Bottom line
Those fearing a hard landing in Korea can take comfort from today's readings. The economy remains on track for a soft landing with no need for a rate cut. We maintain our call for a 25bp rate hike by the BoK to 3.50% in 1Q 2012.