South Korea: The cost of trade dependence

Preliminary estimates show that real GDP decreased by -0.3% q/q in the first quarter of 2019 (after +1% q/q in Q4 2018). Exports declined at a faster pace than in the previous quarter (-2.6% q/q after -1.5% in Q4). Private consumption growth slowed significantly to +0.1% q/q (from +1%). And this deterioration in demand led to a sharp decrease in investment (-2.8% q/q). Going forward, we expect economic growth to improve as trade recovers and policy support gets stronger. USD-denominated exports decreased at a slower pace in April (-2% y/y after -8.2% in March). Business sentiment improved slightly and the manufacturing PMI now signals expansion (50.2 points in April after 48.8 in March). The policy mix is turning increasingly accommodative. The government recently announced an extra budget of KRW6.7tn and we pencil in a policy rate cut of -25bp in the next months to boost growth.