South Korea’s economy marred by MERS outbreak, weak exports

South Korea’s economic growth has been weighed down by falling exports while MERS has choked consumer spending and much needed tourism sector

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

South Korea's economic growth more than halved in the second quarter from the first to record the weakest expansion in six years, battered by a deadly virus outbreak, dry weather and poor exports.

The economy grew just 0.3 percent in April-June over the previous quarter, the central bank estimated on Thursday, the slowest since the first quarter of 2009 with consumption pummelled by an outbreak of Middle East Respiratory Syndrome (MERS).

The much weaker than expected data follows 0.8 percent growth in the first quarter on a sequential basis and marks the weakest since a 0.1 percent gain in the first quarter of 2009. The median forecast from a Reuters survey of 20 analysts was 0.4 percent on a seasonally adjusted basis.

"There is a chance things will turn around in the third quarter but it will be tough for the economy to grow by over 1 percent as the government currently hopes because exports are still bad," said Huh Jae-hwan, an economist at Daewoo Securities.

"Things might improve from the June quarter, but it won't be easy for the economy to make a meaningful comeback."

The economy expanded 2.2 percent in the June quarter from a year earlier, compared with a median 2.3 percent forecast in the Reuters poll and 2.5 percent growth in the first quarter.

Private consumption fell 0.3 percent in quarterly terms, which was the sharpest fall since the second quarter of last year as MERS infected 186 people, 36 of whom died. Bank of Korea Governor Lee Ju-yeol said on Wednesday the loss from tourists cancelling visits because of the outbreak would drag down GDP growth this year by 0.1 percentage point.

In June the central bank cut interest rates for the fourth time since August last year and trimmed its growth forecast for this year, because of the MERS outbreak. The bank's base rate KROCRT=ECI currently stands at 1.50 percent while it sees 2.8 percent growth for 2015.

Huh said it would be unlikely for the central bank to cut rates again, given mounting household debt.

The government has proposed a 11.8 trillion won supplementary budget, which lawmakers are currently debating in parliament, to support the economy as it suffers from MERS effects and a drought that struck in the second quarter.

Thursday's data showed the drought cut farm output by 11.1 percent in the second quarter versus the first, marking its worst fall since the first quarter of 1990.

Meanwhile, capital investment rose 0.4 percent after 0.2 percent growth in the first quarter and construction investment grew 1.7 percent, slowing from a 7.4 percent jump in the previous period.