South Korea Q2 growth hits 2-year high, but China risks cloud outlook

Shoppers walk in the Myungdong shopping district in Seoul, South Korea.
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Shoppers walk in the Myungdong shopping district in Seoul, South Korea.

South Korea's economy grew at its quickest pace in over two years in the second quarter as government stimulus measures offset sluggish exports, but analysts said an emerging slowdown in China has clouded the outlook.

Asia's fourth-largest economy grew a seasonally adjusted 1.1 percent in the April-June quarter from the previous three months, central bank estimates showed on Thursday, marking the fastest since the first quarter of 2011 and beating analysts' forecasts.

(Read more: South Korea Central Bank holds rates, as expected)

The median forecast in a Reuters poll of 23 analysts was for South Korea's economy to post growth of 0.8 percent in the second quarter from the first, when it rose by the same 0.8 percent.

"I think China's economy will slow in the second half and its slowing growth will affect South Korea's exports and capital spending," said Jun Min-kyoo, economist at Korea Investment and Securities.

"As the (South Korean) government's policy is not focused on boosting exports, sluggish exports will continue until next year," he added, referring to President Park Geun-hye's pledge to steer policy more towards growing domestic sectors.

(Read more: Is China about to launch a new round of stimulus?)

From a year earlier, GDP rose 2.3 percent compared to a 2.0 percent increase forecast in the Reuters poll and a 1.5 percent rise in the first quarter of the year.

Private consumption rose 0.6 percent during the second quarter over the previous three-month period, rebounding after a 0.4 percent fall in the January-March quarter. Government spending grew 2.4 percent after a 1.2 percent gain.

Still, analysts agree that the growth outlook remains challenging, especially given a rapid slowdown in China's economy.

Data this week showed China's vast manufacturing sector slowed to an 11-month low in July on fewer new orders, providing further evidence that Asia's powerhouse economy is fast loosing momentum. China is South Korea's biggest export market.

(Read more: Is China's debt nightmare a province called Jiangsu?)

Capital investment, influenced strongly by exports, was already down 0.7 percent in the second quarter compared to the first as export growth slowed to 1.5 percent from 3.0 percent in the first quarter, the Bank of Korea estimates showed.

The country's economy grew 2.0 percent last year and even if growth picks up this year, it would still be far below the pace of growth the country saw before the 2008-2009 crisis. It grew by 4.7 percent on average in each of the 10 years until 2007.