'Import Decline Drives Recession-Type Growth' Impact Expected in Second Half... 1.4% Growth Rate Not Guaranteed (Comprehensive)

Real GDP Up 0.6% in Q2... Continuous Growth
Consumption and Investment Weak, Net Exports Improve
'Recession-Type Growth' with Imports Falling More Than Exports
China's Weakness and Inflation Risks Persist in Second Half

In the second quarter of this year, South Korea's real Gross Domestic Product (GDP) grew by 0.6%. This marks two consecutive quarters of positive growth following the first quarter. However, since both private and government consumption and investment decreased, and imports declined more sharply than exports, this 'recession-type growth' suggests that the overall economic situation remains unfavorable. Additionally, with China's economy?on which South Korea heavily depends for exports?recently slowing down, the outlook for the second half of the year is also not optimistic.

Growth for Two Consecutive Quarters... Both 'Exports and Private Consumption' Declined

The Bank of Korea announced on the 25th that the preliminary real GDP growth rate for the second quarter was 0.6% quarter-on-quarter. Quarterly real GDP growth rates recorded positive figures of 0.7%, 0.8%, and 0.2% in the first three quarters of last year, respectively, before turning negative at -0.3% in the fourth quarter due to a sharp drop in exports. However, this year, growth resumed with 0.3% in the first quarter and continued into the second quarter.

Earlier, the Bank of Korea projected an annual growth rate of 1.4%, with 0.8% growth in the first half and 1.8% in the second half of the year. Based on the first two quarters, the economy grew by 0.9%, slightly exceeding the Bank's forecast. The Bank expects sluggish economic growth in the first half, followed by a recovery in the semiconductor market and export conditions in the second half, leading to a full recovery in growth.

Although the second quarter GDP growth rate was positive, a closer look reveals clear signs of economic sluggishness. Both private consumption and exports, the two main pillars of the economy, declined. Private consumption maintained the previous quarter's level in goods consumption but fell in services such as food and accommodation, turning from 0.6% growth in the first quarter to -0.1% in the second quarter, indicating a contraction. Exports decreased by 1.8%, despite increases in semiconductors and automobiles, due to declines in petroleum products and transportation services.

Government consumption fell by 1.9% due to reduced in-kind benefits from social security such as health insurance, and construction investment decreased by 0.3%, mainly in civil engineering. Facility investment also declined by 0.2%, as increases in machinery were offset by decreases in transportation equipment. Imports dropped sharply by 4.2%, mainly due to reductions in crude oil and natural gas.

Imports Declined More Than Exports... Recession-Type Growth

Despite decreases in private and government consumption and investment, real GDP grew by 0.6% because the decline in imports was larger than that in exports compared to the first quarter, resulting in an increase in net exports. Total real GDP consists mainly of private consumption, government consumption, investment, and net exports. In the second quarter, most of these components recorded negative growth except for net exports, which improved due to imports falling by 4.2% while exports decreased by 1.8%.

Accordingly, an analysis of the contribution of each component to the second quarter growth rate shows that net exports contributed a positive 1.3 percentage points. In contrast, private consumption, government consumption, and construction investment subtracted 0.1, 0.4, and 0.1 percentage points, respectively. Although net exports contributed positively to growth for the first time in five quarters, this is not seen as a positive sign. Particularly, with worsening overall terms of trade, South Korea's real Gross Domestic Income (GDI) in the second quarter remained flat at 0% growth despite the increase in real GDP.

Shin Seung-chul, Director of the Economic Statistics Bureau at the Bank of Korea, explained, "Although major expenditure items such as domestic demand and exports decreased, the scale of net exports was larger than the decline in domestic demand, resulting in positive growth."

Private consumption, which led growth in the first quarter due to increased face-to-face activities, slowed in the second quarter. The Bank of Korea stated, "Consumption related to face-to-face activities, which surged following the full lifting of COVID-19 restrictions at the beginning of the year, temporarily declined. Additionally, adverse weather conditions during the May holidays partially restricted face-to-face activities."

The decrease in government consumption is attributed to reduced government health benefit expenditures as COVID-19 and influenza cases declined in the second quarter.

By economic activity, manufacturing grew by 2.8%, driven by increases in computers, electronics, and optical equipment. The service sector grew by 0.2%, with declines in wholesale, retail, and accommodation and food services offset by growth in transportation. However, electricity, gas, and water supply industries fell by 6.0%, due to decreases in water supply, sewage and waste treatment, and raw material recycling, while construction declined by 3.4%, mainly in civil engineering.

[Image source=Yonhap News]

Can 1.4% Annual Growth Be Achieved?... 'China and Inflation' Risks Remain

The Bank of Korea expects South Korea's economic growth this year to follow a 'low in the first half, high in the second half' pattern. Since the growth rate for the first half was 0.9% year-on-year, the economy needs to grow by 1.7% year-on-year in the second half to achieve the Bank's forecast of 1.4% annual GDP growth. If the economy grows by about 0.7% quarter-on-quarter in both the third and fourth quarters, 1.7% growth in the second half is achievable.

The Bank anticipates improvements in private consumption and exports starting in the third quarter. Director Shin said, "With continued strong automobile exports and increased semiconductor exports, the decline in exports was limited," adding, "It is difficult to say that the current South Korean economy is in a recession; rather, it is showing signs of easing from sluggishness." Director Shin also forecasted that "private consumption will continue a gradual recovery trend from the third quarter onward."

However, many analyses suggest that uncertainties remain high due to inflation and the sluggish Chinese economy, making it difficult to guarantee the 'low in the first half, high in the second half' pattern. Private consumption is unlikely to recover quickly as overall price levels, including dining out costs, remain high. Exports also depend on China's economic recovery. China's GDP growth rate in the second quarter was 6.3% year-on-year, falling short of market expectations of just over 7%, and its unemployment rate reached a record high, indicating poor conditions.

Professor Seok Byung-hoon of Ewha Womans University’s Department of Economics pointed out, "Even optimistically, South Korea is expected to overcome the economic downturn around the fourth quarter," adding, "Due to China's economic slowdown, export recovery is unlikely to become visible quickly." Professor Seok also noted, "Severe recent heavy rains have contributed to rising agricultural product prices, and with the Black Sea Grain Initiative broken, feed prices are expected to rise with a time lag. The government has announced economic policy directions for the second half aimed at early price stabilization and responding to the economic downturn, but the situation may be more challenging than anticipated."

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