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UPDATE 2-S.Korea Q2 growth almost halves as construction slows, exports slip

* Q2 GDP +0.6 pct s/adj q/q (Reuters poll +0.6 pct)

* Q2 GDP +2.7 pct y/y (Reuters poll +2.7 pct)

* Construction output -0.3 pct q/q

* Exports -3.0 pct q/q, capex investment +5.1 pct q/q (Updates after BOK briefing, adds details)

SEOUL, July 27 (Reuters) - A rapid fall in building activity and declining export volumes slashed South Koreas economic growth by almost half in the second quarter, but consumption gave output a surprise boost - suggesting domestic demand may shine in the second half.

Gross domestic product grew a seasonally adjusted 0.6 percent in the second quarter, the Bank of Korea (BOK) said on Thursday, slowing from 1.1 percent growth over January to March as expected. Year-on-year growth was unchanged at 2.7 percent, in line with expectations.

Consumption boosted growth by 1.5 percent point in the second quarter, while negative net exports was a 0.9 percent point drag, resulting in a quarterly expansion of 0.6 percent in the April-June period. Construction declined 0.3 percent on-quarter in seasonally adjusted terms, its sharpest fall in two and a half-years, harshly reversing 5.3 percent on-quarter growth over January-March.

Exports, which account for about 40 percent of GDP, fell 3 percent on-quarter, as shipments of petrochemical goods declined after surging earlier in the year.

"Exports, which surged every month this year, are announced in value terms, while the GDP is output in terms of volume. It shows surging prices of memory chips have been making headline exports growth look rosy," said Lee Sang-jae, an economist for Eugene Investment & Securities Co.

"Recovering consumer sentiment is finally lifting up spending, and it will continue to boost growth in the second half," Lee said.

Private consumption growth more than doubled to 0.9 percent in the second quarter from 0.4 percent in the first as consumer sentiment hit a high not seen in six years, sparking a jump in sales of home appliances and clothes.

"Private consumption will continue to recover throughout the second half," said Chung Kyu-il, a director general at the BOK, adding that the release of new-model smartphones in August could also drive up retail sales.

CONSTRUCTION'S "SOFT LANDING"

Kim Doo-un, an economist at Hana Financial Investment, said the construction sector was seeing a "soft landing" following a boom in building activity.

The BOK said public infrastructure projects, which hire more workers than residential building does, declined in the April-June period, sapping overall output.

"Civil engineering is a high value-added sector that shrank in the second quarter, leading to a decline in construction output," the BOK's Chung said at a news conference.

Nonetheless, capital investment jumped 5.1 percent on-quarter, which ANZ analysts said was at odds with South Korea's sub-trend levels of capacity utilization, and reflected tightly-focused spending on new facilities.

"We believe that (this investment) is narrowly confined to a select set of products, most likely select sub-sectors of the electronics industry," ANZ said in a commentary after the GDP report was issued.

South Korea's average factory utilization rate fell for two months in a row to 71.4 percent in May, as manufacturers saw weaker orders.

News orders in South Korea's manufacturing sector decreased every month this year before a mild upturn in June, highlighting sluggish demand in broad terms.

Although surging prices of memory chips had favoured headline export figures, exports of car parts and electronics components for mobile phones and internet devices declined in June, data from the Korea Customs Service showed.

The central bank expects the economy to expand 2.8 percent this year, a little shy of the government's 3 percent forecast, as global demand for South Korea's memory chips, cars and petrochemical goods remains strong.

The government is counting on an 11 trillion won ($9.90 billion) extra budget approved this month to create jobs and provide subsidies for the elderly to boost household income and spending.

($1 = 1,120.4900 won) (Reporting by Cynthia Kim; Additional reporting by Dahee Kim; Editing by Eric Meijer)