Q2 Economy Grows 0.7%... Annual Target at Risk Due to Export Decline

Surpassing Expectations Thanks to Private Consumption Recovery
Concerns Grow Over Economic Slowdown and COVID Resurgence

[Asia Economy Reporter Seo So-jeong] South Korea's real gross domestic product (GDP) growth rate for the second quarter of this year recorded 0.7%, supported by a recovery in private consumption. Although it outperformed market expectations, exports, which underpin the Korean economy, slowed down, and concerns about an economic downturn in the second half of the year are spreading, making it difficult to achieve the annual growth target.

According to the Bank of Korea on the 26th, South Korea's second-quarter real GDP (preliminary figure) grew by 0.7% quarter-on-quarter and 2.9% year-on-year. Despite a decrease in exports and other factors, private consumption increased due to the lifting of all social distancing measures from April 18, raising the growth rate by 0.1 percentage points compared to the first quarter (0.6%).

By sector, private consumption increased by 3.0%, driven by higher spending on semi-durable goods such as clothing and footwear, as well as services like food and accommodation and entertainment and culture. Government consumption rose by 1.1%, mainly due to social security in-kind benefits, and construction investment increased by 0.6%, centered on building construction.

Hwang Sang-pil, Director of the Economic Statistics Bureau at the Bank of Korea, explained, "The contribution of net exports to growth turned negative from 1.7 percentage points in the first quarter to -1.1 percentage points in the second quarter, while the contribution of domestic demand shifted from -1.1 percentage points to 1.8 percentage points during the same period. Net exports declined significantly as exports turned negative, whereas domestic demand rose sharply due to increased face-to-face activities following the easing of quarantine measures." The Bank of Korea expects that if the third and fourth quarters each record a 0.3% growth rate quarter-on-quarter, the annual growth target of 2.7% for this year could be achieved arithmetically.

In the second quarter, growth was maintained by increases in private and government consumption, but the problem lies in the second half of the year. High inflation continues, major economies such as the U.S., Europe, and China are slowing down, and private consumption, which revived due to the resurgence of COVID-19, may contract again. In particular, exports, which supported the first quarter's growth rate, decreased by 3.1%, mainly in chemical products and primary metal products, showing the lowest growth rate since the second quarter of 2020 (-14.5%), raising concerns.

Director Hwang said, "Our economy is expected to be affected by high inflation and the slowdown in major economies' growth, and external uncertainties surrounding exports remain high, increasing downside risks to the economy. Recently, the spread of COVID-19 has worsened consumer sentiment, which could act as a downside risk factor."

Continued interest rate hikes are also factors that dampen consumer sentiment. Following the Bank of Korea's big step (a 0.5 percentage point increase in the base rate) in July, an additional rate hike is expected in August, which could constrain domestic demand.

Joo Won, Head of Economic Research at Hyundai Research Institute, said, "The second-quarter GDP growth rate exceeded market expectations due to the recovery of consumer sentiment following the lifting of quarantine measures in April. However, due to the slowdown in exports in the third quarter and the contraction of consumer sentiment caused by the resurgence of COVID-19 and high inflation, the growth momentum will weaken, and the annual growth target of 2.7% is expected to be missed."

Real gross domestic income (GDI) decreased by 1.0% despite the increase in real GDP. This was due to a deterioration in terms of trade as both export and import prices rose, but import prices for crude oil, coal, and petroleum products increased more sharply than export prices for semiconductors, chemical products, and other export sectors.

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