Korea
Temporary Softening, 2H Should See Improvement
Apr 06, 2006

Madhava Kumar (Mumbai)

Korea’s consumer confidence fell for the second month in March.   The Consumer Expectation Index was 103.4 in March, down from 103.8 in February and 104.5 in January.  A reading above 100 means that consumers still expect economic conditions to improve in the next six months.  The softening in sentiment was most noticeable among the highest income group, which was the likely driver of exceptional department-store sales growth during the recent holiday season.  Consumer sentiment for those with a monthly income of over W4 million fell to 106.9 in March from 111.3 in February and 111.6 in January.

We had expected near-term sentiment to weaken, as there have been some concerns that the domestic demand recovery is faltering.   Externally, concerns over the Fed raising rates more than expected, which would put the US housing market under pressure and thus slow global consumption.  We believe that sentiment will continue to moderate in 2Q, before picking up in 2H.

Implications: Macro data released in the past month show that economic growth appears to be slowing.  Only March export data were solid and outperformed expectations, all the domestic demand data showed deceleration.  March inflation was also below expectations.  Consequently, we believe the Bank of Korea will keep interest rates unchanged at 4% for now at its forthcoming monthly meeting.

Bottom line: We believe the softening in growth and sentiment will be temporary.  What is missing is labor market improvement and wage growth, which lag overall economic growth.  Korea is at the beginning of a capex recovery and wage growth is likely to come later this year.  We expect domestic demand to catch up in 2H06, but not in the V-shaped manner that Korea has seen in the past.  We expect the BoK to raise rates through 2007.  We look for a 50 bp rate hike for the rest of this year, with risk skewed to the upside.





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