South Korea construction contracts

South Korea construction contracts
Published: 26 July 2010

South Korea’s construction industry had its biggest annual contraction since at least 2008 in the second quarter.

Construction shrank 0.8 percent 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 data released today by the Bank of Korea.

The decline contrasts with a quarterly growth rate for gross domestic product 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 percent from a record-low 2 percent.

“Policy makers 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 percent today after the data were released, compared with a 0.6 percent gain in the benchmark Kospi index. The building gauge has tumbled 18 percent this year, while the Kospi has risen 5.1 percent.