[Q&A] Bank of Korea: "Achieving 4.2% Possible if Growth Rate Records 0.8% in Q2-Q4"

The Bank of Korea Announces 'Preliminary National Income for Q1 2021'

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] South Korea's economic growth rate in the first quarter of this year recorded 1.7%. This is 0.1 percentage points higher than the preliminary figure in April (1.6%). However, due to last year's COVID-19 shock and the rise in the won-dollar exchange rate, the Gross National Income (GNI) per capita recorded $31,881, marking a decrease for the second consecutive year.

On the 9th, Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, stated at a press conference after announcing the "2021 First Quarter National Income (Provisional)" report, "If the average growth rate from the second to fourth quarters is around the mid-0.7% to 0.8% level, an annual growth rate of 4.1% to 4.2% is possible," adding, "This will likely create expectations in the market that the Bank of Korea's announced 4% annual growth rate could be somewhat revised upward."

Below is a Q&A session with Director Park

▲ The economic growth rates for 2020 and the first quarter of this year were each revised upward by 0.2 percentage points. What was the main factor behind this?

= In 2020, exports were significantly revised upward. The first quarter of this year is similar. In the first quarter, goods exports were significantly revised upward. Although facility investment was slightly revised downward, it remains at a high level. These figures are revised based on more accurate data as foundational data becomes available.

▲ The GDP deflator for the first quarter rose 2.6% quarter-on-quarter, marking the third consecutive quarter with a 2% range increase. This is higher than the consumer price inflation rate. Is there a possibility that the GDP deflator could influence future inflation?

= The GDP deflator in the first quarter rose 2.6% compared to the previous quarter. The consumer price inflation rate also recorded a 2% range increase. Consumer prices target the actual consumption items households spend on, whereas the GDP deflator reflects prices not only of consumer goods but also export goods and capital goods, which accounts for the difference. If oil prices rise sharply in the short term, the deflator can even temporarily decline. It is not easy to say that the GDP deflator indicates ongoing inflation. If consumer prices continue to rise, the GDP deflator will act to push up the domestic deflator, so we need to observe this further.

▲ The first quarter economic growth rate was revised upward. Is there a possibility that the annual growth forecast for this year will also increase?

= When the preliminary first quarter growth rate was 1.6%, I mentioned that if the growth rates for the second to fourth quarters were each around 0.7% to 0.8%, the annual growth rate would reach 4.0%. Now that the provisional first quarter growth rate has been revised upward to 1.7%, even if the growth rates for the second to fourth quarters are in the high 0.6% to around 0.7% range, the annual growth rate will reach 4%. If the quarterly growth rate rises to the mid-0.7% to around 0.8%, the annual rate will be 4.1% to 4.2%. This upward revision of the provisional growth rate is likely to create market expectations that the Bank of Korea's forecast of 4% growth will be exceeded.

▲ The GNI per capita in dollar terms has declined for two consecutive years. What is the outlook for this year?

= In nominal terms, the Gross Domestic Product (GDP) growth rate is not negative. However, the continuous two-year decline in GNI per capita in dollar terms is largely due to exchange rate effects. In 2019, the won depreciated by nearly 6%, and last year, the won's value fell again, causing the won-dollar exchange rate to rise. Therefore, the key issue this year is how the exchange rate will behave. However, real growth is expected to reach 4%, and the GDP deflator is also rising, so nominal economic growth is expected to increase significantly. Unless the exchange rate rises sharply, GNI in dollar terms is likely to increase.

▲ Last year, the labor income share recorded 67.5%. Is this the highest ever?

= The labor income share recorded 67.5% last year, the highest level since statistics began in 1953. In the 1950s and 1960s, agriculture had a large share, and farmers were not counted as wage earners, so as industrialization progressed and wage earners increased, the labor income share has steadily risen. The labor income share has cyclical characteristics. If the economy does not improve sharply, corporate operating surpluses decrease, but companies tend to maintain their workforce in preparation for economic upturns, and workers tend to resist wage decreases. In other words, the labor income share tends to improve when the economy is weak. Especially last year's improvement in the labor income share was largely due to the government's active employment measures, such as employment stabilization subsidies and emergency job supply programs. These are recorded as wage earnings, which raise the labor income share. Ultimately, the government's employment policies worked in combination to push the labor income share to a record high.

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