Korean construction shrinks as GDP grows

Decline comes as economy chalks up quarterly growth of 1.5%

(SEOUL) South Korea's construction industry had its biggest annual contraction since at least 2008 in the second quarter, deepening a dilemma for policymakers faced at the same time with a sustained expansion in the broader economy.

Construction shrank 0.8 per cent over the three months through June compared with the prior quarter, the third drop in four quarters, and 0.5 per cent from a year ago, according to gross domestic product (GDP) data released yesterday by the Bank of Korea.

The decline contrasts with a quarterly growth rate for GDP of 1.5 per cent, which bolstered the case for the central bank to continue raising interest rates.

Concern about economy-wide inflation pressures outweighed risks from falling house prices when the bank increased its benchmark this month to 2.25 per cent from a record low 2 per cent.

'Policymakers can't stop raising interest rates just because the construction sector is in trouble, which was already doing badly when rates were at a record low,' said Lee Sung Kwon, an economist at Shinhan Investment Corp in Seoul.

'The government is seeking measures to support the industry, but it'll be difficult to find a good solution unless homebuyers' sentiment improves.'

The 36-member Korea Construction Index of stocks fell 0.4 per cent yesterday after the data were released, compared with a 0.6 per cent gain in the benchmark Kospi index. The building gauge has tumbled 18 per cent this year, while the Kospi has risen 5.1 per cent.

The government is contemplating steps to boost the property market after home prices in Seoul fell for three straight months through June, according to data from Kookmin Bank, the nation's largest lender.

The administration of South Korean President Lee Myung-bak, who suffered an unexpected reversal at local elections on June 2, last week delayed announcing the property policy after officials failed to reach agreement on the proposals.

Land Minister Chung Jong Hwan said on July 21 that he doesn't plan to loosen mortgage-lending controls for now, while Finance Minister Yoon Jeung Hyun said that the nation's property prices are unlikely to fall sharply.

'The property market has emerged as a major political concern,' Park Sang Hyun, chief economist at HI Investment & Securities Co in Seoul, said last week.

South Korea tightened restrictions on mortgage lending last year to slow loan growth. Banks can extend as much as 50 per cent of a borrower's annual income for purchases of homes in Seoul and 60 per cent for areas outside the capital.

The quarterly gain in GDP reported yesterday exceeded the 1.3 per cent median forecast in a Bloomberg News survey of seven economists. From a year earlier, GDP rose 7.2 per cent.

The growth figures raise the risk of the Bank of Korea boosting rates twice more by year-end, Barclays Capital analysts said yesterday as they increased their 2010 GDP growth projections to 6.1 per cent from 5.7 per cent. -- Bloomberg

Source: Business Times, 27 Jul 2010