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Why the South Korean Economy Expanded More Slowly in 2Q17

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Economic activity in 2Q17

Slower growth in exports, manufacturing, and investments impacted economic activity in South Korea (EWY) in 2Q17. The South Korean economy expanded 0.60% month-over-month and 2.7% year-over-year in 2Q17.

South Korea (EEM) is currently trying to balance the difficult relations between the United States (SPY) and China (FXI). The deployment of the Terminal High Altitude Area Defense (or THAAD) missile system backed by the United States seems to have affected Seoul’s relationship with China. South Korea’s manufacturing sector is seeing fewer new export orders from China over the last few months, which affected economic growth in 2Q17.

In the graph below, you can see GDP growth in South Korea over the last year.

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GDP growth in 2Q17

South Korea’s (IEMG) GDP growth in 2Q17 matched the expectations of a 0.60% expansion. However, it was lower than the 1.1% expansion in the previous quarter. Slower growth in 2Q17 was mainly due to contractions in construction, manufacturing, and primary activity. However, the utility sector, which has been lower for the last few quarters, returned to growth in 2Q17. Services grew at a faster pace of 0.80% since the fourth quarter of 2015.

South Korean economy

South Korea (EWY) is currently facing security threats from North Korea and corruption within its own political parties and corporations run by chaebols, a system of family-owned conglomerates. Chaebols, which wield power for their own benefit, is considered a threat to South Korea’s economy.

Investments

The Korea Composite Stock Price Index (or KOSPI), South Korea’s benchmark index, has risen about 18.0% so far in 2017, as of July 28, 2017. Samsung Electronics (SSNFY), the largest stock in the KOSPI with a weight of more than 20.0%, has risen ~33.0% in the same period. The country-specific index, the iShares MSCI South Korea Capped (EWY), has also risen about 31.0% in the same period.

Let’s look next at consumer confidence in South Korea.

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