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Trading  | January 24, 2018

For only the 4th time since 1999 (and for the first time since Lehman), South Korea’s economy unexpectedly shrank in Q4 (contracting 0.4% QoQ against expectations of 0.1% expansion), busting the global-synchronized-growth narrative.

Only two analysts forecast the possibility of a contraction…

Government spending rose 0.5% QoQ, and while private consumption rose 1.09% QoQ, construction investment tumbled 3.8% QoQ

Exports were the biggest driver – plunging 5.4% QoQ – the biggest drop since 1985…

As Goldman notes, Korea’s 2017 Q4 GDP contracted 0.2% quarter on quarter (seasonally adjusted), slowing sharply from 1.5% in Q3 and falling for the first time in nine years. The figure was well below consensus and as well as our expectations. Main points:

1. Korea’s 2017 Q4 GDP contracted 0.2% quarter on quarter (seasonally adjusted), slowing sharply from a high base of 1.5% in Q3 and recording the first sequential decline in nine years. The figure was well below expectations. In year-on-year terms, growth was lowered to 3.0% from 3.8% in Q3.

2. Domestic demand’s total contribution to sequential GDP growth moderated to 0.6pp, from 0.8pp in the previous quarter. By expenditure, final consumption (including both private and government) continued solid growth of 0.9% qoq sa, helped by a re-acceleration in private consumption to 1.0%. Fixed investment declined 2.0% qoq sa, the first decline in three years. Facilities investment fell 0.6% qoq sa, and the contraction was more pronounced in construction activities (-3.8% qoq sa). The drag from fixed capital formation offset the relative strength in final consumption. Inventories accumulation turned positive again, adding 0.6pp to headline growth.

3. Net exports’ contribution to sequential growth fell back to -0.8pp. Exports recorded a sequential contraction of -5.4% qoq sa, but slowing from a sharp growth of 6.1% in Q3. Imports also declined 4.1% due mostly to lower machinery imports according to the Bank of Korea press release.

4. By industry, manufacturing contracted 2.0% qoq sa, the weakest print since Q1 2009. While the detailed breakdown by sectors is not yet available, the BOK press release highlights that the weakness was concentrated in transport equipment production including autos. In contrast, services continued positive growth at 0.4%, although moderating from 1.1% in the previous quarter.

5. For the full year of 2017, Korea’s real GDP grew 3.1%, up from 2.8% growth during the previous two years (2015-2016). The weaker-than-expected Q4 GDP figure, however, mechanically lowers our 2018 growth estimate to 2.8%, somewhat below the central bank’s latest forecast of 3.0%. In our view, distortions from unusually long holidays in Q4 2017 may have accentuated the sequential volatility, but the underlying momentum in export volumes adjusted for the distortions remains solid. Latest 20 day exports figure for January supports our view, with daily ex-ships exports accelerating from December to 14.5% yoy.

So Q4 2017 saw the worst economic environment since Q4 2008…

But stocks were soaring…

And PMIs said “everything was awesome”…


Perhaps most worrisome is that South Korea is often termed ‘the canary in the world trade coalmine’ and this downside surprise will do nothing to confirm the ‘globally synchronized growth’ narrative.

With The Won soaring to four-year highs…

How long before South Korea rejoins the currency wars?

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