South Korea going gangbusters in contrast to UK

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The data being reported out of Asia is in marked contrast to what we are seeing in Europe and North America.  Last week, I noted that Singapore had put up big numbers.  China is also expanding robustly. Compare that with the data coming out of Europe like the UK growth numbers released today and you can see that Asia is de-coupling.  Now comes South Korea.  The BBC reports.

South Korea’s economy expanded in the second quarter by its fastest rate in five-and-a-half years.

Gross domestic product rose 2.3% from the previous three months. It fell 2.5% from the same quarter a year earlier, a smaller-than-expected fall.

Increased government spending, help for car buyers and record low interest rates helped boost the economy, the country’s central bank said…

The growth in the April-to-June period.. compares with 0.1% growth from January to March and a 5.1% drop in the October-to-December period.

Its exports rose 14.7% in the second quarter compared with the previous three months, helped by a weak won.

“The domestic demand growth was aided by tax benefits for car purchasers and fiscal spending. It’s hard to say the economy is set for self-driven recovery, given the dim jobs market outlook,” Kim Myung-kee at the Bank of Korea.

While economists welcomed the data, they voiced some caution.

South Korea’s growth was “driven a good mix of strong fiscal stimulus, a weak won and monetary easing”. But it is unclear if, as fiscal stimulus wanes and credit expansion slows, this growth will continue, Mr Kim added…

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The fly in the ointment here is the fact that much of the increase in Asia is due to government stimulus and a comparison to already low numbers.  If you recall, Asia was crushed by the slowdown in the West, with export volumes falling 30-50% across the board. It’s kind of easy to show huge growth when you are doing so from a low base.  Going from 100 to 90 to 93 is not as indicative of a true recovery as going from 100 to 97 and back to 100.

So caution is certainly warranted here.  As I mentioned on Wednesday, Stephen Roach, a well-known economist based in Asia, says he doesn’t see good underlying demand fundamentals anywhere – and that presumably includes Asia (At about 4 minutes into the video linked above, he says: “The ultimate question here: where is the demand? And as I go around the world, especially in Asia, you know, I don’t see any follow through on the demand front”).

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My conclusion: these are very good numbers and they do point to a faster rebound in Asia than elsewhere.  However, it is not entirely clear that the underlying demand without government stimulus is indeed robust.  Once fiscal policy is normalized in places like China and South Korea the true fundamentals will be clear.

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