Despite 3.9% Economic Growth in H1... Uncertainties Spread Due to Delta Variant

Department Store Sales Growth Slows... Consumption Shrinks Amid 4th Wave Pandemic

Shinsegae Department Store, Sales Growth Rate Before and After July 4th Level Upgrade Drops from 19.0% to 8.1%

Exports Decline in Q2, Imports Increase

Facility Investment Growth Rate Also Plummets

Bank of Korea Forecasts Possible Annual Growth of 4%

How Much Will the Supplementary Budget Effect Contribute... Could Raise Growth by up to 0.5%P

[Asia Economy Reporters Kim Eunbyeol, Jang Sehee] Our economy grew by 3.9% in the first half of this year, showing a faster-than-expected recovery thanks to private consumption. Consumption, which had been subdued, grew significantly alongside the expanded distribution of COVID-19 vaccines.

However, the Bank of Korea believes this growth trend cannot be unconditionally optimistic. With the domestic COVID-19 4th wave surge earlier this month and the upgrade of social distancing levels, consumption that had barely revived is likely to decline. Park Yangsu, Director of the Economic Statistics Bureau at the Bank of Korea, said at a briefing on the 27th, "So far, the outlook path has been consistent, but the trajectory will be determined by the 4th wave."

Investment and exports have already shown signs of slowing. Especially with the Delta variant spreading overseas, expecting high growth in investment and exports is difficult.

Will Barely Revived Private Consumption Decline?

According to the Bank of Korea on the 27th, the GDP growth rate in Q2 recorded 0.7%. The growth rate for the first half was 3.9%, exceeding the Bank of Korea's May forecast of 3.7% by 0.2 percentage points. Director Park stated, "If growth continues at 0.7% in both Q3 and Q4, an annual growth rate of 4.0% is achievable."

The sharp decline in consumption after Q3 due to the 4th wave is a variable. Private consumption grew by 3.5% in Q2, the largest increase in 12 years since Q2 2009 (3.6%), but this trend may be broken. Particularly, the food service, sports, and cultural sectors are inevitably hit.

Revenge consumption is also likely to slow down. According to Shinsegae Department Store, the year-on-year sales growth rates for May and June were 21.0% and 17.6%, respectively, and before the 4th level upgrade in July (~11th), the sales growth rate was 19.0%. However, from the 12th to the 25th, the sales growth rate was only 8.1%. Although still positive compared to the previous year, the growth trend has sharply declined.

Online and supermarket consumption are supporting private consumption. According to the credit card industry, the card approval amount in July has not turned negative year-on-year yet, supported by online consumption. Director Park said, "Although the 4th wave has caused some contraction in consumer sentiment, the degree is gradually narrowing," adding, "The COVID-19 shock tends to be concentrated in specific sectors." Now, even with the intensified spread of COVID-19, many still use hair salons and academies while following quarantine rules, so the consumption shock is not as severe as last year.

Negative Contribution of Net Exports Widens... Unstable Exports and Investment

Exports and investment, which constitute a large part of our economy, are also showing signs of slowing. According to the Bank of Korea, exports in Q2 decreased by 2.0% compared to the previous quarter, showing negative growth. This contrasts with imports, which increased by 2.8%. Goods exports fell by 2.7% quarter-on-quarter. As a result, the contribution of net exports was -1.7 percentage points, widening the negative gap from -0.3 percentage points in the previous quarter. Facility investment is also unstable. Facility investment, which grew by 6.1% in Q1, sharply slowed to 0.6% growth in Q2. Construction investment also decreased by 2.5% due to heavy rains, soaring rebar prices causing construction material supply disruptions, and a reduction in government SOC investment.

The Bank of Korea cited supply disruptions of automotive semiconductors and the downsizing of domestic large companies' LCD businesses as reasons for the Q2 export decline. Since the automotive semiconductor supply issue has been resolved since June, there is no need for serious concern. However, concerns remain in the market that the US and other economies have peaked, and the overseas spread of the Delta variant is also a negative factor for exports. Professor Kim Soyoung of Seoul National University's Department of Economics said, "If the COVID-19 situation ends quickly, investment will not be greatly affected, but if uncertainty increases, investment could be partially impacted," adding, "If the Delta variant continues to spread and lockdowns similar to last year are imposed or industrial production is disrupted, exports could decline again."

Government Supplementary Budget Effect Could Reach up to 0.5 Percentage Points

The Bank of Korea's optimism about 4% growth is partly due to the government's supplementary budget. The government plans to spend 34.9 trillion won starting next month through the second supplementary budget this year. The first supplementary budget, which was 14.9 trillion won, was estimated to have raised the annual growth rate by 0.1 to 0.2 percentage points. Over 80% of the first supplementary budget was spent by June 10, and it was reflected in private consumption.

Professor Kim Soyoung said, "The supplementary budget effect will be significant," adding, "Because the amount is large, it is expected to raise the annual growth rate by about 0.3 to 0.5 percentage points."

The Bank of Korea's announced potential base rate hike within the year could also be a variable. With household debt having increased to 1,765 trillion won, raising interest rates could increase interest burdens, potentially causing people to reduce consumption or investment. However, many expect that the economic impact of rate hikes will be reflected with a time lag and will not immediately contract the economy.

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