South Korea's Economy Faces Unexpected Contraction, Rate Cut Likely

South Korea's GDP shrank by 0.2% in Q2 2024, its sharpest drop since 2022, hit by declining consumer spending despite strong exports. The data has prompted calls for an interest rate cut, with some analysts predicting a move as soon as August. The central bank, however, hints at October.

South Korea's economy experienced an unexpected contraction in the second quarter of 2024, marking its sharpest decline since 2022. This downturn is primarily driven by weakening consumer spending, which has overshadowed a robust export performance.

According to data from the Bank of Korea, the gross domestic product (GDP) for the April-June period fell by 0.2% from the previous quarter, missing analysts' expectations of a 0.1% gain. The concerning economic data has fueled speculations of an imminent interest rate cut, especially with consumer price pressures easing in June. The central bank had recently kept its key interest rate steady at 3.50%, the highest in 15 years, but indicated a possible policy shift given the current economic scenario.

Analysts from Capital Economics suggested that domestic demand is likely to worsen, reinforcing their belief that a rate cut could happen soon, potentially as early as August. However, some believe the Bank of Korea will wait until the U.S. Federal Reserve takes action, which markets predict will be in September. The performance of the Korean won and the stock market also reflected the economic unease, with the won down 0.45% against the dollar and the KOSPI index dropping by 1.9%.

Despite the quarterly decline, South Korea's economy grew 2.3% year-on-year, maintaining an overall growth projection of 2.5% for 2024. Nevertheless, significant risks remain, particularly from rising home prices in Seoul, which may delay rate cuts until October.

(With inputs from agencies.)