[Weekly Review] Concerns Over 'Ssangdungi Deficit' for the First Time in 25 Years... Economic Growth Rate Also Stalls

April Current Account Deficit of $80 Million
Concerns Over 'Twin Deficits' Alongside Fiscal Deficit
OECD Lowers South Korea Growth Forecast to 2.7%
Q1 Economic Growth Slows to 0.6%

Container unloading operations are underway at Busan Port Sinsundae Pier. [Image source=Yonhap News]

The current account, which had been in surplus, turned to a deficit for the first time in 24 months. Consequently, concerns are growing that the 'twin deficits,' where both the fiscal deficit and the current account deficit occur simultaneously, could materialize for the first time in 25 years. The Organisation for Economic Co-operation and Development (OECD) has lowered South Korea's economic growth forecast for this year to 2.7%. This reflects an analysis that domestic inflation has significantly increased due to rising raw material prices, amid growing economic uncertainties.

Concerns Over 'Twin Deficits' for the First Time in 25 Years

According to the preliminary balance of payments statistics released by the Bank of Korea on the 10th, the current account recorded a deficit of 80 million dollars in April. This marks a return to deficit after 24 months. The surge in international oil prices and the resulting rise in raw material costs reduced the surplus in the goods account, while increased dividend payments to foreigners in April caused the primary income account to post a deficit, impacting the overall current account.

Kim Young-hwan, head of the Financial Statistics Department at the Bank of Korea, explained the background of the current account turning to a deficit: "Although goods exports remain steady, the sharp rise in raw material prices has led to a surge in imports, significantly reducing the surplus in the goods account. Additionally, seasonal dividend factors contributed to the current account recording a deficit."

If the current account also shifts to a deficit amid a chronic fiscal deficit situation, the twin deficits could occur for the first time in 25 years since the 1997 foreign exchange crisis. Due to ongoing fiscal stimulus policies amid the COVID-19 pandemic, the fiscal balance has already been on a deficit trend. The integrated fiscal balance, which is total revenue minus total expenditure, is expected to show a deficit for four consecutive years from 2019 through this year.

However, the Bank of Korea views the April current account deficit as a temporary phenomenon and expects the current account to record a surplus on an annual basis. Kim said, "The surplus trend in the services account is likely to continue, supported by the transportation account. Also, the dividend factor in April will ease, so the current account is likely to return to surplus in May."

Nonetheless, some analyses suggest caution, as the goods account surplus?which accounts for a large portion of the current account?is shrinking amid faster import growth than exports due to soaring energy prices caused by the Ukraine crisis and other factors.

OECD Lowers South Korea's Growth Forecast for This Year

The OECD has revised South Korea's economic growth forecast for this year down by 0.3 percentage points from 3.0% to 2.7%. Regarding the Korean economy, the OECD stated, "Exports have maintained a steady trend, but the recovery has slowed due to delayed consumption recovery," adding, "In particular, inflation has surged significantly due to rising raw material prices triggered by the Ukraine crisis."

While social distancing measures have been lifted and supplementary budgets have been enacted, leading to expectations of continued recovery in private consumption, the OECD assessed that household debt, rapid interest rate hikes, and rising housing prices could act as downward pressures on domestic demand.

With the OECD lowering its growth forecast, most major domestic and international institutions have also revised South Korea's growth outlook for this year into the 2% range. The Bank of Korea has adjusted its growth forecast to 2.7%, matching the OECD's figure; the International Monetary Fund (IMF) has revised it to 2.5%, and the Korea Development Institute (KDI) to 2.8%. The government is also likely to lower its growth target from 3.1% to the high 2% range in the economic policy direction to be announced in mid-month.

Meanwhile, the OECD has sharply raised its consumer price inflation forecast for South Korea this year from 2.1% to 4.8%. This is higher than the forecasts of the Bank of Korea (4.5%), KDI (4.2%), and IMF (4.0%). The OECD's forecast represents the highest inflation rate in 24 years since the 1998 foreign exchange crisis (7.5%).

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong are attending a breakfast meeting held at the Press Center in Jung-gu, Seoul, on the morning of the 16th of last month and posing for a commemorative photo. Photo by Kim Hyun-min kimhyun81@

Q1 Economic Growth at 0.6%... Per Capita Gross National Income at $35,000

South Korea's economy grew by only 0.6% in the first quarter of this year.

According to the Bank of Korea, South Korea's real gross domestic product (GDP, preliminary figure) growth rate for Q1 this year was 0.6% quarter-on-quarter. This is 0.1 percentage points lower than the flash estimate announced in April. After recording 1.7% in Q1 last year, growth slowed to 0.8% in Q2 and 0.2% in Q3, then jumped to 1.3% in Q4, but fell back to 0.6% in Q1 this year, roughly halving.

Exports increased by 3.6%, but private consumption decreased by 0.5% quarter-on-quarter, and both construction investment and facility investment shrank by 3.9%. Given that China's lockdown measures continue and high inflation persists, if exports are also hit going forward, growth could slow further.

However, the Bank of Korea expects that the economic growth target of 2.7% for this year is achievable. Hwang Sang-pil, head of the Economic Statistics Bureau at the Bank of Korea, explained, "Arithmetically, if the economy grows by just 0.5% quarter-on-quarter each quarter, achieving 2.7% is possible. Private consumption is expected to continue recovering, supported by eased quarantine measures and supplementary budgets."

Last year, South Korea's per capita gross national income (GNI) exceeded $35,000, marking a return to growth after three years. The per capita GNI was $35,375 (40,482,000 KRW), a 10.5% increase from the previous year. The per capita gross disposable income (PGDI), which is the income households can freely use for consumption or savings, was $19,501 (22,317,000 KRW), up 8.6% year-on-year.

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