Fixed income strategy
The author is an analyst of Shinhan Securities. He can be reached at jk.ahn@shinhan.com -- Ed.
1Q23 data shows 1%-level annual GDP growth could be a challenge
The Korean economy advanced 0.3% QoQ in 1Q23, meeting the consensus estimate and remaining in line with the Bank of Korea's (BOK) GDP growth trajectory for April. Continuing on the pattern seen since 2Q22, contribution to GDP growth came in at positive levels from domestic demand (+0.3%p) but was negative from net exports (-0.1%p) as the former continued to drive economic growth in 1Q23.
However, inventory build-up, at 0.2%p, accounted for most of the 0.3%p contribution from domestic demand with increased consumption offset by reduced investment. In 1Q23, the increase in inventory levels was driven mainly by semiconductors, unsold apartment units, autos, and crude oil. In 2Q23, the BOK expects to see a depletion of chip inventories and decline in unsold apartments, with the latter likely to drive up investment into construction. The central bank also forecasts an upturn in facilities investment in 2Q23, with April data estimates pointing toward an increase in semiconductor equipment imports despite sluggish IT market conditions. However, the BOK’s forecast for manufacturing sector capex spend still remains below the baseline, hinting to a limited rebound in facilities investment in the near term.
Market focus is now turning to GDP growth forecasts for the three remaining quarters.
The Korean economy needs to expand 1.0% QoQ in 2Q23 for annual growth to meet BOK's target of 1.6% for the year, or increase at least 0.8% QoQ for full-year growth to reach 1.4%. Quarterly growth of 0.5% QoQ or below in 2Q23 will likely put 1%-level growth out of reach for 2023, unless the economy stages a 2%-level rebound in 2H23. The BOK had expected GDP growth to reach 2% levels in 2H23 in its February forecast, but has now started to express concerns over the pace of growth in 2Q23. Private consumption and government spending have been solid and investments into construction and facilities are expected to recover, but exports have continued on a downtrend through April 20. Given that quarterly GDP growth above 0.8% would require notable improvement in both exports and domestic consumption, we believe the latest GDP data reaffirmed that reaching 1%-level annual growth would be a challenge under current economic conditions.
BOK unlikely to change stance yet, providing downside support for yields Despite the confirmation of sluggish economic trends, the BOK is unlikely to tone down its tightening stance with the data mostly in line with preemptively lowered forecasts. The Atlanta Fed’s GDPNow model estimate puts US GDP growth at a decent 2.5% for 1Q23. With the probability of an additional increase in the Fed funds rate this June inching up to 7% as a result, we believe the BOK will maintain its tightening stance despite weak economic growth. Yields on major KTBs should see limited downward pressure until the May FOMC meeting and the release of economic indicators at home and abroad. Meanwhile, odds of an additional BOK rate increase are also slim given the confirmation of sluggish economic growth. As a result, KTB yields are likely to remain range bound in the near term with an upper limit of 3.50%.