Manufacturing Fuels Economic Expansion in Q2

Jul 7, 2007 - South Korea’s economy grew sharply in the second quarter, expanding at its fastest rate in a year, fueled by strong output of semiconductors, ships and automobiles, the Bank of Korea said.

Gross domestic product expanded 4.9 percent in the three months ended June 30 from the second quarter last year, the central bank said. That was up from the 4 percent rate in the first quarter and the highest since growth of 5.1 percent in the second quarter last year. Compared with the previous quarter, the economy grew 1.7 percent.

For 2007, the central bank projects GDP growth of 4.5 percent, compared to last year's 5.0 pct.

'The growth figure for the second quarter came at the upper end of our previous forecasts,' said Lee Kwang-June, the head of the economic statistics bureau at the BoK.

He said the fast growth pace over the first half of the year was partly due to the early execution of investment in social infrastructure, as well as strong facility investments.

Although the bank expects a smaller sequential growth rate in the third quarter, the BoK is keeping its view that the country's economic momentum will accelerate into the end of the year and beyond, Lee said.

Analysts believe the strong second quarter number may strengthen the Bank of Korea's case for a further interest rate increase.

At its last policy meeting on July 12, the central bank raised its benchmark call rate target by 25 basis points to a six-year high of 4.75 percent, saying there was a need to mop up excess liquidity which, it feared, could fuel inflation.

There has been conjecture in the markets that another rate increase is in the offing, especially as BoK governor, Lee Seong-Tae, said at the end of the last meeting that interest rates were 'not so high as to dampen economic recovery.'

In response to the latest GDP data the BoK in a written statement said: 'On the production side, the construction sector sagged, while the service sector maintained solid growth and the manufacturing sector reversed its downturn.'

The manufacturing sector expanded 3.6 percent sequentially in the second quarter, after contracting 0.9 percent in the first. The service sector grew 1.1 percent in the second quarter because of strength in the financial intermediation segment.

'On the spending side, construction investment retreated and the pace of private consumption growth eased, while facility investment and merchandise exports continued their solid uptrend,' the central bank said.

Exports grew 5.2 percent sequentially in the second quarter because of robust demand overseas for petrochemical products, industrial machinery and ships. In the first quarter exports grew 2.7 percent quarter-on-quarter.

Private consumption rose 0.8 percent sequentially in the second quarter, after a 1.5 percent rise in the first. The bank blamed lower spending on durable goods such as home appliances for the slower growth.