South Korea Pulls Off Decent Growth, but What's Missing?

Kim Jae-Hwan | AFP | Getty Images

South Korea grew at its fastest pace in two years in the first quarter of 2013, but economists warn the positive headline figure hides worrying aspects of Asia's fourth largest economy.

Gross domestic product (GDP) growth was 0.9 percent quarter on quarter in the January to March period suggesting that South Korea may have shrugged off the impact of an appreciating won against the Japanese yen and the threat of war with North Korea as government action to frontload spending and boost its budget are taking effect.

The strong headline figure was boosted by a 3.2 percent rise in exports over the previous quarter and on the 2.9 percent jump in fixed investments. But experts point to the decline in private consumption that fell 0.3 percent in the first quarter as an indicator that this pace of growth may not be sustainable.

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"Fixed investment bounced [for the first time in four quarters] but we don't know how much of the bounce was due to government spending and how much was private," said Tim Condon, Asia economist at trading firm IG Markets.

He added that "Based on the contraction in private consumption, I assume the government was responsible for a lot of the bounce in fixed investment. Government spending tends not to have much staying power, so the first quarter could be the peak growth quarter this year," he added.

Adding to last year's stimulus, President Park Geun-hye this month announced an extra government budget of $15 billion to spur growth and ease the impact of the yen's decline, record household debt and a stagnant housing market on its economy.

(Read More: South Korea Sets Modest Stimulus Spending)

The yen has weakened 25 percent against the U.S. dollar since mid-November putting South Korea at a disadvantage, as Japan is able to sell its exports much more cheaply.

Condon expects this competition from Japanese producers to have a deeper impact on export growth and private spending later in the year. The won has appreciated 2.4 percent against the dollar since mid-November, and 17 percent against the yen in the same period.

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"We don't expect any further monetary easing, which means a pick-up in private spending is hostage to exports, where competition from Japanese producers will be a headwind," said Condon, who forecasts South Korean GDP to rise 2.7 percent this year, lower than the 3.4 percent that is widely expected.

Song Seng Wun, regional economist at Singapore-based CIMB Bank, agreed that the decline in private consumption was a cause for concern.

"The headline GDP figure may look encouraging but when you look at the details they do not give us much hope. The fact that private consumption was down indicates in itself how consumers feel about the global economy," he said.

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"Global economic indicators, such as PMI [Purchasing Managers' Index], shipping data and export trends all suggest global growth is going to be much weaker than we had hoped for this year, which will take its toll on South Korea's export-led economy," added Wun.

But there are others who are more optimistic about South Korea's growth prospects. "Looking at the detail it's hard to see any evidence of the weaker yen trend impacting on growth. Exports were up a solid 3.2 percent in the quarter"

said Jonathan Cavenagh, forex strategist at Westpac Global Strategy Group.