Is the Economy Really Improving... Why Bank of Korea and Statistics Korea Indicators Differ [Why&Next]

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Although South Korea's economic growth rate in the first quarter significantly exceeded expectations, subsequently released industrial activity indicators showed a slowdown, causing confusion in interpreting the economic data. The government and the Bank of Korea explained that the differences in statistics between the two sides were due to variations in data aggregation methods, affirming that the economy is indeed improving. However, economic uncertainties are expected to persist going forward.

According to the industrial activity trends announced by Statistics Korea on the 30th, total industrial production in March this year decreased by 2.1% compared to the previous month. Total industrial production, which reflects the domestic economic trend, had been increasing for four consecutive months since November last year but turned to a decline in March. The decrease was the largest in four years and one month since February 2020 (-3.2%) during the COVID-19 period.

With the poor March figures, total industrial production in the first quarter increased by only 0.7% compared to the previous quarter. This falls significantly short of the Bank of Korea's earlier announced preliminary first-quarter real Gross Domestic Product (GDP) growth rate of 1.3%. The industrial production index by Statistics Korea is used alongside GDP as a key indicator of economic trends, but the large discrepancy between the two has caused confusion.

Examining detailed items reveals large differences between the two statistics in consumption and exports. In the GDP statistics, private consumption in the first quarter grew by 0.8% compared to the previous quarter, whereas the retail sales index in the industrial activity trends decreased by 0.2%. Similarly, exports in the first quarter grew by 0.9% quarter-on-quarter in the GDP data, but manufacturing exports declined by 1.5% in the industrial activity trends. There were significant statistical differences in the core sectors of the Korean economy: consumption and exports.

In response, the government explained that these differences arise solely from the different statistical aggregation methods and that the economy did improve in the first quarter. For consumption, the industrial activity trends only account for retail sales of durable and semi-durable goods, while GDP consumption encompasses all consumption activities, including retail and service sales, leading to differences in results. Regarding exports, the industrial activity trends cover a narrower survey scope, whereas GDP exports include products made by Korean companies overseas, covering a broader range and causing discrepancies in figures.

Lee Seung-han, Director of the Comprehensive Policy Division at the Ministry of Economy and Finance, stated, "The Bank of Korea's GDP statistics are based on a census survey, whereas the industrial activity trends are sample surveys with a smaller coverage," adding, "For understanding overall economic trends, it is better to refer to GDP statistics." A Statistics Korea official also said, "The statistical aggregation methods differ in detailed items," and "Total industrial production, which is timely, is useful for observing short-term economic trends, while GDP is appropriate for grasping the overall economic situation."

Export containers are being loaded onto a ship at Busan North Port. Photo by Jinhyung Kang aymsdream@

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Despite the government's explanation, the poorer industrial activity trends in March compared to January and February are expected to sustain concerns about economic slowdown. This concern is particularly due to most industrial indicators, excluding semiconductors, showing negative results.

Manufacturing production excluding semiconductors in March fell by 4.3%, a decline 0.8 percentage points larger than overall manufacturing production. This was influenced by reduced production in electronics and telecommunications (-3.2%) and automobiles (-0.9%). The manufacturing production diffusion index, which reflects the perceived economy, also dropped to 38.2, the lowest level since July last year (38.2).

The government explained that the poor March figures are a base effect following improvements in January and February, but some analyses suggest it indicates weak domestic demand. Jin-kyung Lee, an economist at Shinhan Investment Corp., said, "March total industrial production turned to a decline even in IT items that had been recovering steadily, giving back all the gains from February," diagnosing that "while proactive inventory accumulation occurred since the beginning of the year, demand recovery, especially domestically, has been slower than expected."

Although consumption rebounded in March, its sustainability was assessed as weak. The economist added, "The private consumption surprise in the first-quarter GDP was largely due to early government budget execution," and predicted, "While rising asset prices support consumer sentiment, reducing the likelihood of a sharp consumption downturn, delays in interest rate cuts and employment slowdown will inevitably weaken consumption momentum."

Researcher Jin-sung Kim of Heungkuk Securities also evaluated, "Looking at the industrial activity trends, production, investment, and consumption in the first quarter this year all showed lower performance compared to the fourth quarter of last year," indicating "the overall domestic economic recovery, especially the vitality of domestic demand, is very narrow and shallow."

With the poor March total industrial production, there is speculation that the Bank of Korea's preliminary first-quarter economic growth rate may be lowered in the upcoming provisional release. This is because the timing of the Bank of Korea's preliminary statistics does not fully reflect the indicators for the final month of the quarter. A Bank of Korea official said, "Due to the timing characteristics of data aggregation, the first-quarter GDP preliminary estimate includes March statistics as projections," adding, "This partly explains the differences with Statistics Korea's indicators."

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