April 26, 2018 / 12:08 AM / a month ago

South Korean economy rebounds in first quarter on exports, government spending

SEOUL (Reuters) - South Korea’s economy bounced back last quarter, buoyed by booming exports of data memory chips and a boost from government spending, although private consumption was sluggish.

Giant cranes are seen at the Hanjin Shipping container terminal at Incheon New Port in Incheon, South Korea, September 7, 2016. REUTERS/Kim Hong-Ji/File Photo

Thursday’s Bank of Korea GDP report showed the economy expanded 1.1 percent in the first quarter, rebounding after contracting by 0.2 percent in the fourth quarter and beating the 1.0 percent forecast in a Reuters poll.

Export volumes, particularly for memory chips and other IT products, gained 4.4 percent and added to growth.

Samsung Electronics (005930.KS), South Korea’s world-leading tech exporter, posted a record quarterly profit of 11.6 trillion South Korean won ($10.75 billion) on Thursday thanks to booming sales of semiconductors used in servers.

The upbeat data drove the benchmark Kospi .KS11 index 1.1 percent higher as of 0552 GMT, while yields on 10-year treasury debt fell to 2.754 percent from 2.762 percent on Wednesday's close.

The chip boom has offset soft domestic demand and the blow to tourism from diplomatic tensions with China over South Korea’s installation of a U.S. THAAD missile defense system.

Private consumption, which accounts for about half of GDP, marked its slowest growth in a year, gaining a mere 0.6 percent from the previous quarter.

The service sector grew 0.9 percent on-quarter, but output of food and lodging services declined 0.9 percent even as South Korea hosted the Winter Olympics in PyeongChang in February-March.

“The food and lodging sector is still suffering from fewer Chinese tourists as part of the THAAD backlash,” said Chung Kyu-il, a director general at the Bank of Korea.

“People also went out less due to the cold wave and fine dust issues,” Chung said.

FILE PHOTO: Hyundai Motor's sedans are assembled at a factory of the carmaker in Asan, about 100 km (62 miles) south of Seoul, January 22, 2013. REUTERS/Lee Jae-Won/File Photo

Chung said 4.1 percent growth in service sector output from ‘cultural activities’ reflects a boost from the Winter Olympics, reversing the service sector’s 1.8 percent fall in the fourth quarter.

In annual terms, GDP rose 2.8 percent in the first quarter, on par with a 2.8 percent rise in the fourth quarter.

Government spending rose 2.5 percent and posted the fastest quarterly gain in six years, thanks to higher spending on health care.

“The expanded medical benefits boosted government spending, while surging shipments of memory chips are still supporting exports,” a Bank of Korea official said.

HEADWINDS FROM WEAK JOB GROWTH, SLOWING TECH BMI Research, an arm of rating agency Fitch Group, said the economy would face headwinds from tepid job growth and a moderating manufacturing sector.

“The cyclical expansion in the manufacturing sector will likely cool amid slowing demand from the global tech cycle,” it said in a note.

    “Furthermore, we believe that private consumption will likely be subdued amid a persistently high youth unemployment rate and elevated household debt levels.”The central bank expects the economy to expand 3 percent this year, but that estimate is subject to global demand for South Korean memory chips and other manufactured goods in the face of a feared trade war between the United States and China and its potential fallout.

    According to market research firm GfK, global smartphone demand fell two percent to 347 million units in the first quarter of 2018. Demand was especially sluggish in China and North America, it said.

    ($1 = 1,079.3000 won)

    Reporting by Cynthia Kim; Editing by Eric Meijer

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