BMI View: We believe that construction activity in South Korea could pick-up in 2013 even though the lack of construction growth in recent quarters has dampened our near-term outlook for the construction sector. This pick-up is due to improving monetary conditions for construction activity, the government's commitment to improve the country's infrastructure, growing demand for tourism-related facilities and housing stimulus measures. As such, we are forecasting real growth for the construction sector to reach 2.7% in 2013, an improvement from the estimated growth of 0.7% in 2012.
Growth in South Korea's construction activity has continued to be in negative territory in the third quarter of 2012. The latest data from the Bank of South Korea showed that the construction industry contracted by 1.9% year-on-year (y-o-y) in Q3 2012, similar to the growth rate in Q2 2012.
This decline was once again due to contractions in the residential and non-residential building construction sectors. Residential and non-residential building activity both shrank by 3.1% y-o-y and 1.8% y-o-y in Q312, declining faster than the contraction of 1.4% seen previously for both sectors. Activity in the civil engineering (or infrastructure) sector also remained in negative territory. The sector contracted by 1.1% y-o-y in Q3 2012, a slight improvement from the contraction of 2.0% y-o-y in Q212.
|Q3 2011||Q3 2012||% chg y-o-y||9M 2011||9M 2012||% chg y-o-y|
|*Building Maintenance Is Incorporated Into BMI's Residential & Non-Residential Building Industry Component. Source: Bank of Korea, BMI|
|Construction Of Residential Structures||2309||2237||-3.1||6765||6741||-0.4|
|Construction of Non-Residential Structures||5700||5597||-1.8||16601||16893||1.8|
|Civil Engineering (Infrastructure)||5563||5503||-1.1||16447||16099||-2.1|
This poor Q312 performance has once again prompted us to revise our forecasts for the South Korean construction sector for 2012. We have revised down our construction and infrastructure forecasts for South Korea to real growth of 0.7% and 0.3% in 2012 (previously 2.2% and 1.4% respectively).
|A Minor Improvement In 2013|
|South Korea Construction, Infrastructure, Residential and Non-Residential Industry Value Real Growth Forecasts, % y-o-y|
Although we believe that construction activity in the country has returned to positive territory in 2012, the lack of infrastructure and building activity suggests that this recovery could be weaker than expected. Infrastructure investment from the South Korean government has not been as forthcoming as previously announced, while export activity in South Korea - a key driver of non-residential building activity - has fallen into negative territory, dampening the demand for non-residential buildings. Meanwhile, the launch of a stimulus plan by the South Korean government to reignite the demand for housing in mid-2012 - the stimulus includes a temporary easing of taxes on property transactions, where taxes on home purchases would be halved (to under 2%) until the end of 2012 - has yet to reinvigorate residential building activity, with the rate of increase in housing prices still declining.
|Declining Exports Affects Non-Residential|
|South Korea Total Exports Growth And Non-Residential Building Construction Real Growth (At 2005 Prices, Seasonally Adjusted), % y-o-y|
Liquidity And Infrastructure Lead Construction Improvement
Looking ahead, we believe that construction activity in 2013 should improve from 2012. We are forecasting real growth for the construction sector to reach 2.7% in 2013. One of the reasons for this positive outlook is because we expect monetary conditions to be favourable for the construction sector. Inflationary pressures in South Korea are expected to be relatively well contained, providing leeway for the Bank of Korea to adopt monetary easing measures (e.g. cut interest rates) to support economic and construction growth ( see our online service, December 31 2012, 'BoK To Maintain Neutral-Dovish Bias In 2013').
|Monetary Conditions Growing Conducive|
|South Korea - BoK Base Rate, % & Headline Consumer Price Index (CPI), % y-o-y|
We believe that the increase in construction activity will be led by infrastructure activity, with the sector outperforming the residential and non-residential construction sector in 2013 and beyond. Real growth for the South Korean infrastructure and residential/non-residential building sectors is forecast to reach 3.6% and 2.1% in 2013 respectively, as well as average 3.3% and 0.6% per annum between 2014 and 2017. This is because we believe the government remains committed towards improving the country's infrastructure over the long-term. The South Korean transport ministry had previously announced a US$170bn plan to upgrade the entire country's transport infrastructure by 2020, which includes building or expanding roads, railways (high- and normal- speeds), airports and seaports. It had also announced plans to invest US$43.9bn in the country's power generation capacity by 2024, with a particular emphasis on developing alternative energy sources (nuclear, renewables) to reduce the country's reliance on oil imports.
Tourism Driving Non-Residential
Non-residential building activity should also pick up as we approach the 2018 Winter Olympics. The event is expected to trigger an estimated US$8.4bn construction boom in South Korea over the coming years, with most of the activity originating in the commercial construction sector. Not only are there plans to build and refurbish several stadiums, but hotels, retail and leisure developments are also expected to be developed to cater for the increase in tourist arrivals from and house Olympic participants. Tourist arrivals to South Korea also continue to grow robustly and this will drive demand for tourism-related facilities. Tourist arrivals have reached record highs since the start of 2012, with year-to-date tourist arrivals growing by 15.1% y-o-y to reach 10.3mn at the end of November 2012.
|Still Achieving New Highs|
|South Korea - Tourism Arrivals, By Month|
Non-residential building activity could however, be capped by a lack of demand for South Korea's manufacturing exports. Although we have seen global economy activity improve recently, we believe that a strong pick-up in global activity is unlikely to be sustainable. The eurozone has yet to resolve its fiscal problems, while the cyclical upturn in China's economy is, in our view, likely to start to lose steam towards the latter stages of H113 when structural deficiencies are likely to reveal themselves again.
Residential Capped By Structural Deficiencies
Residential building activity could also pick up in 2013 due to the stimulus measures discussed earlier. However, we maintain our view that real growth for the residential/non-residential building sector will be dragged down by the residential sector over the long-term. This is because the macro fundamentals in South Korea (ie, declining population growth, stagnant wage growth and static unemployment rate) do not support a robust demand for housing over the coming years.
|Stimulus An Aid To Housing|
|South Korea - Quarterly Residential Construction Real Industry Value (At 2005 Prices, Seasonally Adjusted), KRWbn; And Housing Prices, % chg y-o-y|
Household debt in South Korea also remains at a very high level, and acts as a cap on the population's ability to finance new housing. Credit extended to households stood at KRW911.4trn (US$774.5bn) at the end of March 2012. Measured against the size of the domestic economy, South Korea's debt-to-GDP ratio came in at 69% at the end of March 2012, more than twice the levels seen in the late 1990s when the financial sector went through a period of liberalisation.