South Korea Economy Posts Strong 2nd-Quarter Growth

South Korea gave a strong signal Thursday that its economic recovery has strength and staying power as it chalked up 9.8% annualized GDP growth for the second quarter.

The results solidify South Korea’s lead at the head of the Asian recovery pack and provide further evidence that the North Asian nation has emerged from its 20-month nightmare. In most sectors of the economy, South Korea is now back to where it was before the December 1997 crash.

“This is very strong,” said Robert Subbaraman, analyst with Lehman Bros. Asia. “This clearly shows Korea is leading Asia out of recession and into recovery.”

The headline 9.8% gross domestic product growth figure, which exceeds most analysts’ expectations, is so large in part because last year’s second-quarter 7.2% contraction was by comparison so dismal.

Still, growth during the April-June period was fairly broad-based as consumers, retailers and exporters all pitched in. The laggards were government spending and the construction industry.

The main South Korean stock index rose 2.24 points to 871.18, stocks’ first gain in five trading sessions, after the GDP report was released.

Although South Korea’s economy is not expected to keep up this torrid pace in the second half, growth is likely to remain strong this year, analysts say.

“We expect the growth rate for all of the year to reach at least 7%, Chung Jung-ho, a director-general at the Bank of Korea, told reporters in Seoul.

The brighter horizon and Thursday’s news prompted many economists to bump up their 1999 forecasts to around 7% for the year and 6% for next year.

“The private sector is coming back to life,” said Chi Lo, senior economist with investment firm HSBC Asia. “It’s impressive.”

One of the big economic linebackers this year has been the South Korean consumer. With the worst of the layoffs wave apparently over and the unemployment rate narrowing to around 6%, those with jobs feel more secure and willing to open their pocketbooks. South Korea’s robust stock market has also put more people in the mood to shop. “At first, it was fairly rich people spending,” said Haruhiko Shinohara, South Korea-based senior economist with Daiwa Research Institute. “As wage levels and unemployment starts to recover, the same trend is now spreading to the middle class.”

Exports, likewise, were up a strong 16% as they continued their impressive showing. South Korea has benefited in recent months from a sharp rebound in global demand for semiconductors and other electronic components. The strengthening Japanese yen, which closed in New York at 111.40 to the dollar, should help South Korean exporters further by making their products more competitive against those of Japanese manufacturers.

Construction fell 7.9% on top of a 6.6% decline a year earlier. But even in this deeply depressed area, there was some sign of life. A construction trade group said Thursday that orders for September were up 17%.

One reason last quarter’s powerful rate of growth is expected to ease is that pent-up demand from ’98 will be satisfied in the near future. In 1998, most people hunkered down and saved every last won, which led to store owners’ reducing the amount of inventory they kept on their shelves. With confidence returning, stores are restocking at a rapid pace, buying new computers, repairing cash registers, replacing linoleum. Once shelves are full again, the burst in orders will probably slow. Expenditures by companies were up 37.2% in the quarter. Likewise, consumers have been making up for lost time as they buy clothes, refrigerators and furniture they did without last year. At some point, that backlog also will be exhausted and spending should slow to a more sustainable pace. Consumer spending surged 9% during the quarter.

Finally, if South Korea remains serious about corporate restructuring, it will need to pay the piper in slower growth. This follows because the nation needs to eventually reduce its oversupply of firms and factories--a painful process.