Red Light for South Korea's Growth Rate... Expected to Fall Below 1.6% (Comprehensive)

Q1 Economic Growth Rate 0.3%
IT Sector Slump Adds to Woes
Delayed Effect of China Reopening
Government's Early Budget Execution Policy
Key Question: How Much Will It Contribute?
IMF and Others Continue Downgrade Forecasts

[Image source=Yonhap News]

The economic growth rate in the first quarter of this year narrowly avoided negative growth at 0.3% quarter-on-quarter, supported by private consumption. However, with the continued sluggishness in the IT sector and delays in the anticipated effects of China's reopening (resumption of economic activities), red flags have been raised regarding the achievement of this year's economic growth target. The semiconductor industry, a key export sector, is hitting bottom, and the effects of China's reopening since the end of last year have been less significant than expected. As a result, the Bank of Korea is expected to slightly lower its annual growth forecast from the previous 1.6% next month.

On the 25th, the Bank of Korea announced that the real Gross Domestic Product (GDP) growth rate for the first quarter of this year (preliminary figure, quarter-on-quarter) was 0.3%. The quarterly growth rate of the Korean economy had recorded negative growth for the first time in 10 quarters since the second quarter of 2020 (-3.0%), when the impact of COVID-19 fully materialized in the fourth quarter of last year, but it returned to positive growth in the first quarter of this year.

Quarterly growth rates showed negative figures in the first (-1.3%) and second (-3.0%) quarters of 2020 during the spread of COVID-19, followed by nine consecutive quarters of growth. However, exports sharply declined in the fourth quarter of last year, turning growth negative (-0.4%), and the economy rebounded in the first quarter of this year thanks to private consumption.

Looking at the first quarter growth by sector, facility investment decreased while private consumption increased. Private consumption rose by 0.5%, mainly driven by service consumption such as entertainment, culture, food, and accommodation. Government consumption increased by 0.1%, and construction investment grew by 0.2%, centered on building construction. On the other hand, facility investment fell sharply by 4.0%, due to a decrease in machinery such as semiconductor equipment.

Exports increased by 3.8%, mainly in transportation equipment such as automobiles, while imports rose by 3.5%, driven by chemical products and others.

By industry, services slightly decreased, but manufacturing and construction showed growth. Agriculture, forestry, and fisheries declined by 2.5%, mainly in crop farming. Manufacturing increased by 2.6%, with growth in transportation equipment and primary metal products. Electricity, gas, and water supply decreased by 2.0%, mainly in gas, steam, and air conditioning supply. Construction grew by 1.8%, centered on building construction. Services increased in medical, health, social welfare services, and cultural and other services, but decreased by 0.2% due to declines in wholesale and retail, accommodation and food services, and transportation.

Real Gross Domestic Income (GDI) in the first quarter rose by 0.8%, surpassing the real GDP growth rate.

Private Consumption Contribution of 0.3%P... Increase in Face-to-Face Activities Following the Lift of Indoor Mask Mandate

According to the Bank of Korea, private consumption contributed 0.3 percentage points to the growth rate in the first quarter of this year. The lifting of the indoor mask mandate in the first quarter led to an increase in face-to-face activities such as travel and attending performances, positively impacting private consumption. On the other hand, net exports reduced the growth rate by 0.1 percentage points. The ongoing trade deficit recently has cut into the growth rate in the first quarter. This marks the first time since the period from the second quarter of 1998 to the first quarter of 1999, right after the foreign exchange crisis, that net exports have contributed negatively to growth for four consecutive quarters.

Shin Seung-chul, Director of the Economic Statistics Bureau at the Bank of Korea, said, "Despite negative factors such as IT sector sluggishness and delays in the effects of China's reopening, the first quarter growth rate recorded a better-than-expected positive growth. The non-IT sector and private consumption contributed to growth, indicating a moderate growth trend." He added, "Although uncertainties remain high, as the year progresses, the IT sector downturn is expected to ease, and the Chinese economy is also anticipated to recover to some extent, making the growth rebound momentum clearer. We expect the unfavorable situation to persist for a while but improve towards the second half of the year." This suggests a forecast that the Korean economy will show a pattern of slow start and strong finish, gradually recovering.

Regarding key variables for second-quarter growth, Director Shin said, "Normalization of external activities and increased overseas travel will positively affect private consumption, but exports through customs clearance until the 20th of this month still show a significant decline. It will be important to watch how much the easing of real estate regulations and the resulting increase in housing transactions will positively impact construction investment, and how much the government's early execution of the first half budget will contribute to the growth rate."

Major Institutions Continue to Lower South Korea's Growth Forecasts

However, major institutions have recently been revising South Korea's growth forecasts downward one after another. The delayed recovery of the IT sector and continued trade deficits with China make downward adjustments to the growth rate inevitable.

The International Monetary Fund (IMF) lowered South Korea's growth forecast by 0.2 percentage points from 1.7% to 1.5% on the 11th. The IMF has consecutively downgraded South Korea's growth rate four times since July last year (from 2.9% to 2.1%), then in October (2.0%), January this year (1.7%), and April (1.5%).

The biggest reason major institutions have lowered South Korea's growth forecasts is the semiconductor sector. The global economic slowdown and continued IT sector weakness have hit South Korea, a powerhouse in memory semiconductors, directly. Due to weak demand for IT finished products amid the global economic recession, the downturn in the memory semiconductor industry has prolonged, and inventories have piled up like a snowball. Samsung Electronics recorded an 'earnings shock' with its operating profit in the first quarter of this year dropping by about 96%, leading to a decision to cut memory semiconductor production.

Regarding the semiconductor market outlook, the Bank of Korea stated, "Currently, semiconductor inventories are high, so Samsung Electronics had to reduce production. This measure limits the decline in memory semiconductor prices, and as inventories decrease, it will create an opportunity for the semiconductor market to recover. Fundamentally, potential demand for semiconductors remains high, so the semiconductor and IT sectors are expected to return to a recovery trend."

Joo Won, Head of Economic Research at Hyundai Research Institute, said, "Trade deficits with China continue, and the anticipated effects of China's reopening are smaller than expected. The recovery timing of IT demand is also continuously delayed due to the global economic recession, making it inevitable to lower this year's growth forecast." He added, "Future growth depends on private consumption supporting the economy and exports rising. If the Bank of Korea lowers its growth forecast in the revised economic outlook in May, it is unlikely that interest rates will rise further, and the policy may shift toward interest rate cuts this year."

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