Q2 Our Economy Shrinks 0.2%... Domestic Demand Weakness in Consumption and Investment (Update)

Due to continued sluggish domestic demand such as consumption and investment, South Korea's economy experienced negative growth in the second quarter.

Cargo is stacked on a container ship docked at Busan Port. Photo by Jinhyung Kang aymsdream@

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The Bank of Korea announced on the 5th that South Korea's real gross domestic product (GDP, preliminary) growth rate for the second quarter was recorded at -0.2% compared to the previous quarter. This figure is the same as the flash estimate released on July 25.

South Korea's economy showed positive growth for five consecutive quarters, with 0.4% in Q1 last year, 0.6% in Q2, 0.8% in Q3, 0.5% in Q4, and continuing into Q1 this year. The negative growth is the first in six quarters since Q4 2022 (-0.5%).

Exports continued to show strong performance, while domestic demand remained sluggish. Looking at the growth rate by expenditure item in the second quarter, exports increased by 1.2% quarter-on-quarter, centered on automobiles and chemical products. Imports also rose by 1.6%, mainly due to energy products such as crude oil and natural gas, as well as petroleum products.

On the other hand, private consumption, an indicator of domestic demand, decreased by 0.2% quarter-on-quarter due to weak consumption of goods such as clothing and passenger cars. Construction investment also declined by 1.7%, with decreases in both building construction and civil engineering. Facility investment fell by 1.2% due to a reduction in machinery such as semiconductor manufacturing equipment.

Compared to the previous flash estimate, facility investment (up 0.9 percentage points), exports (up 0.3 percentage points), and imports (up 0.4 percentage points) were revised upward, while construction investment (down 0.7 percentage points) and government consumption (down 0.1 percentage points) were revised downward.

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Looking at the growth contribution by expenditure item for Q2 GDP, all showed negative figures except for government consumption (0.1 percentage points). Net exports recorded -0.1 percentage points, construction investment -0.3 percentage points, private consumption -0.1 percentage points, and facility investment -0.1 percentage points. This contrasts with the first quarter, where all areas except facility investment showed positive growth.

By sector, the private sector accounted for -0.2 percentage points, and the government sector 0 percentage points, indicating that negative growth was driven by the private sector.

Examining growth rates by economic activity, the decline in construction was prominent. Construction decreased by 6.0% due to reductions in both building and civil engineering construction. Manufacturing increased by 0.8% quarter-on-quarter, mainly driven by transportation equipment. The service sector maintained the previous quarter's level, with decreases in information and communication, wholesale and retail, and accommodation and food services, but increases in transportation and real estate.

Real gross national income (GNI) in the second quarter fell by 1.4% quarter-on-quarter, marking the lowest since Q3 2021 (-1.6%). Due to worsening terms of trade, real trade losses expanded from 11.3 trillion won to 16.6 trillion won, causing the GNI growth rate to lag behind the GDP growth rate (-0.2%).

The GDP deflator, an index representing the overall domestic price level, rose by 4.8% year-on-year. The total savings rate in Q2 (35.2%) increased by 0.1 percentage points from the previous quarter, and the gross domestic investment rate (30.7%) rose by 1 percentage point quarter-on-quarter.

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