[Weekly Review] Second Quarter Bottom Theory Emerges... Overcoming -3.3% Contraction with a 'Triple Rebound'

[Sejong=Asia Economy Reporter Kim Hyunjung] Expectations are growing that the domestic economy will bottom out in the second quarter of this year and turn to a recovery trend. Although the -3.3% negative growth in the second quarter is worse than the 2008 fourth quarter during the financial crisis, it is still considered a relatively good performance compared to global countries hit by the novel coronavirus (COVID-19). The government plans to actively seek investment opportunities and focus all efforts on economic recovery for a full-fledged rebound in the third quarter.

◆Direct hit to exports leads to -3.3% growth in Q2= On the 23rd of last month, the Bank of Korea announced that the real gross domestic product (GDP, preliminary figure) for the second quarter was 447.4 trillion won, down 3.3% from the previous quarter. This is the lowest level since the first quarter of 1998 (-6.8%) during the International Monetary Fund (IMF) foreign exchange crisis. When comparing to the second decimal place, it was even worse than the fourth quarter of 2008 during the financial crisis. The growth rate was -3.28% in the financial crisis and -3.33% in the second quarter of this year.

The problem was the slow recovery in exports. Exports, which recorded -1.4% in the first quarter, fell further to -16.6% in the second quarter. Exports are at their lowest level since the 1970s, effectively the worst ever.

Private consumption turned positive from -6.5% in the first quarter to 1.4% growth in the second quarter. This was due not only to the slowdown in the spread of COVID-19 domestically but also the effect of the government's emergency disaster relief funds. However, government consumption rose by only 1.0%, down 0.4 percentage points from 1.4% in the first quarter. Both construction and facility investment turned negative. Construction investment, which was 0.5% in the first quarter, turned to -1.3% in the second quarter, and facility investment dropped from 0.2% to -2.9% in the same period. The real gross domestic income (GDI) growth rate for the second quarter, considering terms of trade, fell to -2.0%, the lowest since the fourth quarter of 2008 (-3.4%) during the financial crisis.

However, compared to the performance of countries like the United States and Germany, Korea is considered to have held up relatively well. The U.S. second quarter GDP growth rate announced on the 30th (local time) was -32.9% (annualized rate) compared to the previous quarter. Germany's second quarter growth rate was about -34.7% (annualized). When converted to quarter-on-quarter growth rates like Korea, Germany and the U.S. recorded approximately -9.5% and -10.1%, respectively, much worse than Korea.

[Image source=Yonhap News]

◆Successful 'triple rebound' in production, consumption, and investment= Production, consumption, and investment all increased in June, as announced on the 31st of last month, marking a 'triple rebound' for the first time in five months since December 2019.

According to the Statistics Korea's 'June Industrial Activity Trends,' total industrial production increased by 4.2% month-on-month, retail sales by 2.4%, and facility investment by 5.4%. Mining, manufacturing, and electricity & gas industries all increased, leading to a 7.2% rise in industrial production compared to the previous month. This is the largest increase in 11 years and 4 months since February 2009 (7.3%) during the global financial crisis.

In particular, manufacturing production rose 7.4% month-on-month despite a 1.1% decrease in primary metals, thanks to increases in automobiles (22.9%) and semiconductors (3.8%). Manufacturing shipments increased by 8.4% month-on-month, driven by automobiles and chemical products. Export shipments rose 9.8%, the largest increase in 32 years and 9 months since September 1987 (19.2%). Meanwhile, inventories decreased by 1.4% month-on-month due to reductions in chemical products and primary metals, despite increases in electronic components and electrical equipment. The average operating rate of manufacturing rose 4.9 percentage points from the previous month to 68.3%.

The retail sales index increased by 2.4% month-on-month, with sales of durable goods such as passenger cars (4.1%), semi-durable goods such as clothing (4.7%), and non-durable goods such as cosmetics (0.4%) all rising. Facility investment increased by 5.4% month-on-month, with investments in machinery such as precision instruments (4.7%) and transportation equipment such as automobiles (7.2%) both rising. Construction performance (constant prices) increased by 0.4% month-on-month, with civil engineering down by 0.3% but building construction up by 0.7%.

The coincident index of economic indicators, which shows the current economic situation, and the leading index, which forecasts future economic conditions, both rose for the first time in five months. They increased by 0.2 points and 0.4 points month-on-month, respectively.

Last year, the market capitalization of housing prices in South Korea exceeded 5,000 trillion won for the first time since statistics began in 1995. The ratio of housing market capitalization to Gross Domestic Product (GDP) also rose to the highest level ever recorded. According to the Bank of Korea on the 26th, the nominal housing market capitalization, which is the total market value of domestic housing prices at the end of last year, was 5,056.7924 trillion won, a 7.4% increase from the previous year (4,709.6118 trillion won). The photo shows apartments viewed from Namsan Tower in Seoul on the same day. Photo by Kim Hyunmin kimhyun81@

◆Full effort to absorb liquidity by discovering investment opportunities= The government is accelerating this positive momentum by actively seeking investment opportunities to absorb liquidity released into the market due to low interest rates. On the 30th, it decided to allow general holding companies to own corporate venture capital (CVC) to promote large corporations' investments in ventures and startups and activate innovative finance, with the condition of '100% ownership of shares.' To prevent private profit-taking, investments in companies or affiliates where the controlling family holds shares are prohibited.

CVCs will be established as wholly-owned subsidiaries of general holding companies owning 100% of shares, and two types will be allowed: small and medium business startup investment companies (venture capital firms) and new technology business finance companies. CVCs owned by general holding companies can borrow up to 200% of their equity capital and are expected to raise external funds within 40% of the fund size (detailed ratios to be specified in enforcement ordinances). However, to prevent side effects from relaxing the principle of separation between finance and industry, the scope of business is limited to 'investment,' and investments by controlling families, related companies, or large business groups are blocked. Contributions from financial companies among controlling families and affiliates are also prohibited when raising funds. The government plans to revise the Fair Trade Act and legislate within this year through the regular National Assembly session.

To revive consumption, the government will implement eight major consumption coupons benefiting 18 million people from the end of July. The expected consumption scale through this is about 1 trillion won. To support innovative companies, 1,000 national representative innovative companies with innovation and technological capabilities in various industrial sectors such as digital and green new deals, new industries, materials, parts, equipment, and services will be selected for comprehensive financial support totaling 40 trillion won over three years through loans, guarantees, and investments. For revitalizing public institution-led innovation cities, ten collaborative projects will be promoted, including ▲Busan-type youth startup hub creation ▲Daegu green energy campus construction ▲Gwangju and Naju energy valley creation ▲Wonju silver medical device mecca creation.

Earlier announced plans such as the 'Korean New Deal Comprehensive Plan' worth 160 trillion won (114 trillion won national funds, 25 trillion won local funds, 21 trillion won private funds) and the private investment activation plan worth 30 trillion won plus alpha are also representative investment activation measures.

◆Ruling party's rapid progress... Lease 3 Acts immediately enforced= This week, the contract renewal request system and the rent ceiling system for tenant protection were rapidly passed and implemented, drawing attention. On the 30th of last month, the government held an extraordinary cabinet meeting chaired by Prime Minister Chung Sye-kyun at the Government Seoul Office to review and approve the promulgation of the amendment to the Housing Lease Protection Act, which introduces the contract renewal request system and the rent ceiling system, passed by the National Assembly the previous day as part of the 'Lease 3 Acts.'

The government plans to complete the promulgation procedure on the same day after the president's approval and publication in the official gazette. The law will take effect immediately upon publication in the gazette. The Housing Lease Protection Act was submitted to the Legislative and Judiciary Committee, the relevant standing committee, on the 29th, passed the same day, cleared the plenary session the day before, passed the extraordinary cabinet meeting on the day, and thus was implemented within two days of submission to the committee.

Prime Minister Chung explained the background of the swift approval, saying, "If the law's enforcement is delayed, excessive rent increases and tenant damages may occur in the meantime, and it could rather cause market instability." Accordingly, tenants can now request an additional two-year contract extension, and landlords must accept it unless there are reasons such as actual residence. Rent increases cannot exceed 5% of the previous contract amount.

This content was produced with the assistance of AI translation services.