3.4% growth in the first quarter ‘Early interest rate cut’ is a headwind to the recovery of consumer sentiment
Economic growth in the first quarter is dependent on consumer-driven securities firms' toutation of an interest rate cut in June and July, showing a headwind in the economic recovery.
The ‘July interest rate cut and decline to 3.0% by the end of the year’ led by securities companies led the economic growth in the first quarter, growing by 1.3% compared to the previous quarter, but foreign analysts and foreign media diagnosed on the 25th that ‘recovery is uncertain’.
“The data provides an encouraging sign that the worst is over for Korean consumption, but the labor market has weakened and debt service burdens are rising,” Capital Economics economist Shivaan Tandon said in a report on the Bank of Korea data. "I am not confident that today's data signals the start of a strong recovery, given that it is likely to remain high," he said on the 25th.
“It is too early to say whether consumption has turned a corner,” a Bank of Korea official said at a briefing on the 25th after the release of first quarter data.
Reuters reported on the Bank of Korea's announcement on the 25th, "The Korean economy grew at the fastest pace in more than two years, exceeding all expectations in the first quarter thanks to a recovery in domestic consumption and solid exports, but the market raised questions about whether the recovery is sustainable." revealed.
A Reuters survey of economists said on the 23rd that the Korean economy grew 0.6% last quarter and is expected to maintain the same pace of expansion as the past three months as improving exports offset weakening household consumption.
Reuters surveyed 21 economists from the 17th to the 22nd, and the median forecast of economists was that the gross domestic product (GDP) from January to March would grow by 0.6% compared to the previous quarter on a seasonally adjusted basis, compared to the previous quarter. It was the same. Estimates were between 0.3% and 1.1%.
“Consumer demand remains weak,” said Gareth Leder, senior Asia economist at Capital Economics, in a research note, pointing out South Korea’s weak domestic demand. “Retail sales data for January and February point to continued weakness in spending, as well as high interest rates and the labor market. “Further easing is expected as cooling weighs on demand,” he wrote.
Regarding growth in the first quarter, the survey results showed that GDP was expected to grow by 2.4% compared to the same period last year, which was the median estimate of 25 economists and was faster than the 2.2% growth in the previous quarter.
The Bank of Korea's first quarter results showed that the increase in domestic demand was stronger than expected, leading to GDP growth, and private consumption increased by 0.8%, up from 0.2% three months ago, which was 0.2% higher than expected.
The Bank of Korea announced in March that actual inflation was high at 3.1% compared to the inflation target of 2.0%.
The producer price index in March was 122.46, up 0.2% from the previous month, and producer prices have risen for four consecutive months since December of last year. The increase rate compared to the same period last year was 1.6%, rising for eight consecutive months since August of last year, with the increase in producer prices being 1% of the increase in growth rate. It grew 3.4% in the quarter, a sharp increase from the 2.2% increase in the fourth quarter of last year.
Economists' expectations for Korea's growth rate were a 2.4% increase.
At the interest rate freeze press conference on April 12, Governor Lee Chang-yong responded to the question, "Will the Bank of Korea consider the option of lowering the benchmark interest rate before the U.S. Federal Reserve?" and responded, "It is true that the timing of the U.S. interest rate cut will be delayed more than originally expected," adding, "The U.S. is sending a pivot signal." “In a similar situation, there is greater consideration of the domestic inflation rate, so (interest rate cuts) may be done before or after the U.S.,” he said of the ‘early interest rate change.’
Bloomberg's interest rate forecast compiled by securities companies on December 5 last year also showed four interest rate cuts of 25bp each in 2024, and domestic securities companies rushed to diagnose the rate as an early interest rate cut.
KB Securities said in a report on August 24 last year that “the Bank of Korea will cut interest rates in the second quarter of 2024,” and in an October report it said “the third quarter.”
Samsung Securities published a report at the beginning of this year saying that the Bank of Korea will lower the base interest rate three times (July, October, and November) starting in July, and in April, the Bank of Korea changed its outlook from freezing interest rates to cutting rates twice in October and November. .
Samsung Securities' change in April was in response to the Fed's first interest rate cut period being 'revised from June to September'. Meritz Securities changed Korea's interest rate cut period announced earlier this year in April from July to August. The number of cuts was reduced from three times to two within the year.
In April, Sangsang Securities changed the existing ‘May interest rate cut’ to an August interest rate cut, and predicted that the Bank of Korea would lower the interest rate by 50bp at the end of the year to 3.0%.
In April, NH Investment & Securities said, “If the U.S. Federal Reserve maintains a rate cut signal in the second half of the year,” the Bank of Korea will “cut interest rates starting in July,” saying, “If the interest rate is lowered even once, the current interest rate level is judged to be attractive.” He announced that he would stimulate the economy by recommending 'actively buying the stock market when interest rates are cut'.
Governor Lee Chang-yong hinted at 'economic stimulus' at a press conference announcing the decision to freeze interest rates on August 24 last year, and securities companies announced 'an interest rate cut in the first and second quarters of next year.'
Hanwha Investment & Securities '2nd quarter of next year', NH Securities '1st quarter of next year', KB Securities '2nd quarter of next year', Shinyoung Securities '50bp (twice) per year in 2nd quarter of next year', etc.
As for economic indicators in the first quarter of this year, despite the real estate recession, construction investment surged 2.7%, becoming the leader, and private consumption increased 0.8%.
In March, there were 104 general construction business closures, a 25.3% increase compared to the same period last year, and 104 new registrations, a 68.7% decrease compared to the same month last year (333).