South Korea’s economy grew at an unexpectedly robust 3.2% annual rate in the second quarter, driven by firmer domestic consumption and capital investment, but analysts said the lift would probably be temporary.
The June quarter’s annual 3.2% outperformed a poll forecast of 2.9%, and topped the 2.8% year-on-year growth seen in the first quarter. It was the fastest expansion seen since third quarter 2014.
Gross domestic product expanded 0.7% in April-June, following 0.5% growth in the first quarter, Bank of Korea (BoK) estimates showed yesterday.
Analysts at Australia and New Zealand Banking Group said it would be “beyond surprising” if this economic momentum were to continue.
“The challenges that lie ahead for the South Korean economy in terms of the scope of corporate debt restructuring in a low-trade environment (and with monetary policy nearing its lower limit) are formidable,” ANZ said in a note.
The data were in line with a median 0.7% seasonally adjusted gain tipped in a Reuters survey and matched 0.7% growth in the fourth quarter of 2015.
Markets shrugged off the data as offshore factors diverted investor attention.
Although yesterday’s news offered some hope as Asia’s fourth-largest economy struggles to escape low growth, an ongoing overhaul of the country’s shipping and shipbuilding industries may prove a hurdle as tens of thousands of jobs are expected to be lost in the process.
Exports have been falling since January 2015 and policymakers see headwinds hindering private consumption.
South Korea will submit a $9.7bn supplementary budget to parliament later yesterday, which will focus on creating 68,000 new jobs to make up for the severe job cuts.
In a surprise move, the bank of Korea cut interest rates to a record-low 1.25% in June, and most market analysts see one more cut by year-end. Capital investment rose 2.9% after tumbling 7.4% in the first quarter. This was the fastest rise seen since it posted 3.5% growth in the fourth quarter of 2014, but a BoK official said a sustained recovery in capex was doubtful anytime soon. Private consumption rose by a seasonally adjusted 0.9% in the second quarter after slipping 0.2% over January-March period, but it was mostly on temporary factors such as an expired tax benefit scheme for local car purchases.
The bank of Korea and the government currently estimate this year’s GDP growth at 2.7% and 2.8%, 
respectively.