Q1 Growth Rate 1.7%... "Annual Growth of 4.2% Also Expected" (Comprehensive Report 2)

Bank of Korea '2021 Q1 National Income (Provisional)'

Last Year’s Per Capita Gross National Income (GNI), $31,881

Decreased for Two Consecutive Years but Expected to Turn Positive This Year

Steep Growth is Welcome but K-shaped Polarization is a Concern

Imbalanced Recovery Likely to be Accompanied by Soaring Inflation and Interest Rate Hikes

[Asia Economy Reporter Kim Eunbyeol] Our economy grew by 1.7% in the first quarter of this year. This exceeded the initially announced preliminary figure (1.6%), as exports increased more than expected, boosting the growth rate. As a result, the size of our economy has not only recovered to pre-COVID-19 levels but also raised expectations for an annual growth rate exceeding 4% for the first time in 11 years. The Bank of Korea (BOK) forecasted that the annual growth rate could rise to as high as 4.2% when reflecting the first quarter growth rate. This confirmed that the pace of our economic recovery is faster than initially expected, considering industrial trends such as production.

However, due to the impact of the COVID-19 shock and the rise in the won-dollar exchange rate, last year’s per capita GNI was recorded at $31,881, marking a decrease for two consecutive years. Recovery speeds vary by sector, and with rising inflation, concerns have emerged that vulnerable groups such as low-income and small-scale self-employed individuals, who survive on debt, will face shocks proportional to the growth rate.

First Quarter Growth Rate Revised Up from 1.6% to 1.7%... "Annual Growth Possible at 4.2%"

According to the ‘2021 First Quarter National Income (Preliminary)’ released by the Bank of Korea on the 9th, the real Gross Domestic Product (GDP) for the first quarter increased by 1.7% compared to the fourth quarter of last year. This marks three consecutive quarters of growth since the third quarter of last year and significantly surpasses the level of the fourth quarter of 2019, before the COVID-19 outbreak.

Private consumption in the first quarter rose by 1.2%, and government consumption increased by 1.6%. While facility investment was revised downward by 0.4 percentage points, the export growth rate was revised upward by 1.3 percentage points. By economic activity, the service sector was sluggish, but manufacturing showed a 3.8% growth, revised upward by 1.1 percentage points. The nominal GDP for the first quarter, reflecting inflation, rose by 1.9% quarter-on-quarter and 4.6% year-on-year.

Last year, our economy’s real growth rate was -0.9%, revised upward by 0.1 percentage points from the previous figure (-1.0%). The 2019 growth rate was also revised up from 2.0% to 2.2%. Last year’s nominal GDP, reflecting price levels, was 1,933 trillion won, a 0.4% increase from the previous year.

Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, is presenting at the 2021 Q1 National Income (Provisional) briefing held on the 9th at the Bank of Korea in Jung-gu, Seoul.

With the first quarter growth rate higher than expected, the possibility of exceeding 4% annual growth has increased. Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, said, "If the average growth rate for the second to fourth quarters is around 0.7 to 0.8%, annual growth of 4.1 to 4.2% is possible," adding, "The market is likely to form expectations that the Bank of Korea’s announced annual 4% growth may be revised upward." If the export growth expands further and vaccination accelerates, the growth rate is highly likely to exceed 4%.

According to the ‘May Employment Trends’ announced by Statistics Korea on the same day, the number of employed persons increased by nearly 620,000 compared to a year ago, marking three consecutive months of growth. The per capita GNI, which had declined for two consecutive years, is also likely to turn positive this year. Director Park said, "The nominal GDP in the first quarter also appeared higher than the real GDP growth rate, so unless the exchange rate rises sharply, per capita GNI will also increase."

Large Service Sector Still Struggling While Inflation Rises

Although the preliminary first quarter growth rate was revised upward, the recovery showed differences by sector. Looking at the ‘2021 First Quarter National Income (Preliminary)’ released by the Bank of Korea by sector, the manufacturing-centered recovery was prominent. Manufacturing grew by 3.8%, driven by strong performance in transportation equipment, computers, electronics, optical devices, and chemical products, while the service sector increased by only 0.7%, centered on wholesale and retail trade, accommodation and food services, and finance and insurance. Although negative growth has been avoided since the second quarter of last year (-0.8%), the growth rate remains in the 0% range, much lower than manufacturing.

Wholesale and retail trade grew by 3.4%, supported by strong automobile sales and department stores, but accommodation and food services decreased by 5.4% compared to the previous quarter. Although people exhausted by social distancing measures are engaging in ‘pent-up (revenge)’ consumption, this consumption mainly occurred at large stores such as department stores and supermarkets. The food service industry has taken a direct hit from COVID-19. This means that small-scale self-employed businesses have not benefited from the economic recovery. Meanwhile, finance and insurance (2.6%) and information and communication (2.2%) sectors maintained growth rates in the 2% range, while culture and others contracted by 2.3%. Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "Since the trickle-down effect in our economy has weakened, exports are doing well but domestic demand is not following. Subjectively, the domestic demand side continues to face difficulties."

As the global economic recovery continues, rising raw material prices push inflation up, which could worsen the perceived economic conditions. According to Statistics Korea, the consumer price inflation rate in May rose by 2.6% year-on-year, marking the highest level in about nine years. Professor Ha added, "If inflation rises without domestic demand recovering, the perceived economic conditions will inevitably be poor." The GDP deflator, which represents the overall price level in Korea, also rose by 2.6% in the first quarter, the highest since the third quarter of 2017 (3.7%).

Improvement in Distribution Indicators, BOK Says "Cyclical Factors are Significant"

The Bank of Korea announced that last year’s labor income share improved to 67.5%, the highest level ever compared to 66.4% in 2019. However, this was the result of artificial adjustment through government fiscal intervention. It means that government influence was greater than market functions.

Regarding this, the Bank of Korea evaluated that labor income share tends to improve when the economy is difficult. Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, explained, "Corporate operating surpluses decreased, but companies maintained their workforce, and workers refused wage cuts, so wages hardly fell." The improvement in the distribution rate was due to less wage decline and the combined effect of government fiscal responses.

However, the government took a positive stance. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, praised the upward revisions of economic growth rates for the first quarter of this year, last year, and 2019 as a ‘Triple Level-up’ on his Facebook. Regarding the labor income share, he said, "It is due to the efforts of companies and the government to maintain employment, which kept employee compensation slightly increasing."

Meanwhile, last year’s per capita GNI was $31,881 (3,762,000 won), a 1.0% decrease in US dollar terms from the previous year, marking a decline for two consecutive years. However, since the exchange rate rose by more than 1%, it increased by 0.2% in won terms.

Increased Debt Due to Prolonged COVID-19... Could Become a Trigger with Interest Rate Hikes

Although sectoral gaps remain, the economy is surging according to indicators, increasing the likelihood that the Bank of Korea will raise the base interest rate within the year, possibly as early as the third quarter.

Professor Ahn Dong-hyun of Seoul National University’s Department of Economics expects the recovery to continue in the second quarter, considering the speed of vaccination, saying, "Since the economy shrank due to the virus rather than a typical recession, it can grow in a different pattern from past economic fluctuations."

The biggest risk when raising interest rates considering economic recovery and inflation is the already increased debt. According to the Bank of Korea, household credit balance as of the end of March was 1,765 trillion won, the largest scale since statistics began in 2003. Professor Ha said, "Household and small business debts are steadily increasing, posing a risk factor," advising, "If debt burdens increase during the process of raising interest rates, it would be good to use fiscal policy to increase the capacity to repay debt."

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