South Korea's export recovery is unlikely to be sustained in the coming months, and low inflation would give the central bank enough room for further monetary loosening later this year, Capital Economics Asia Economist Gareth Leather said Thursday.
The economist observed that given the renewed weakness in external demand the South Korean economy is unlikely to sustain first quarter's impressive growth during the rest of the year, though robust government spending could provide a further boost in the next couple of quarters.
Capital Economists forecasts that muted inflation pressures would prompt the central bank to cut interest rates by 25 basis points before the end of the year. The Korean economy is expected to expand by around 2 percent this year, which is below the government's own forecast of 2.3 percent and the consensus of 3 percent.
Weak export demand would also dampen activity in other parts of the economy, such as investment in new equipment, which is typically highly-correlated with the performance of the export sector, the economist said.
Weakening the economic activity, high levels of household debt, a weak housing sector and a faltering labor market suggest that private consumption will remain downbeat in the coming months.
Advance estimates released by the Bank of Korea today showed that the economy expanded a seasonally adjusted 0.9 percent sequentially in the first quarter, faster than the 0.3 percent gain seen in the fourth quarter, marking the fastest growth in two years.
Driving the GDP growth, exports increased 3.2 percent, recovering from the 1.1 percent contraction seen in the fourth quarter. At the same time, investments advanced by 2.9 percent after falling 1.6 percent in the three months ended December 2012, contributing to the overall growth.
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