South Korean GDP unexpectedly shrinks, boosting rate cut chances

SEOUL (Reuters) - South Korea's economy unexpectedly shrank in the second quarter to log the sharpest contraction in six quarters as slumping consumer spending undermined an export boom, reinforcing market expectations that an interest rate cut could be on the way soon.

Gross domestic product (GDP) for the April-June period fell 0.2% from a quarter earlier in seasonally adjusted terms, data from the Bank of Korea showed, missing a 0.1% gain seen by analysts in a Reuters poll.

That came after an expansion of 1.3% in the first quarter, the fastest quarterly growth since the fourth quarter of 2021.

Capital Economics said the data suggests domestic demand conditions will only worsen.

"The weakness of the latest GDP figures give us more confidence in our view that interest rate cuts are around the corner," Capital Economics said in a note. "While we expect the central bank to loosen policy starting from October, the risk of a rate cut in August has risen now."

On an annual basis, Asia's fourth-largest economy grew 2.3%, compared with a gain of 3.3% in the first quarter of 2024.

Both private consumption and construction investment declined 0.2% and 1.1% from a quarter earlier, respectively, while exports increased 0.9%.

Government expenditure was up 0.7% from three months earlier.

The central bank left its key interest rate unchanged at a 15-year high of 3.50% for the 12th straight meeting in July.

The latest Reuters poll indicated the first rate cut was likely to come next quarter.

(Reporting by Cynthia Kim; Editing by Jacqueline Wong and Sam Holmes)