First Quarter GDP Posts Surprise Growth... This Year's Battle Between Semiconductor Boom and Middle East Shock (Comprehensive)

In the first quarter of this year, South Korea’s economy achieved a “surprise growth” that exceeded market expectations. While private consumption served as a pillar, robust exports led by semiconductors and investments to expand production capacity came together to drive growth. However, there are now concerns that the annual growth rate for this year may fall below the previous forecast of 2.0%, due to the impact of the Middle East war that broke out at the end of February. The trajectory of this year’s growth will depend on whether the shock from the war, which will become more pronounced from the second quarter onward, or the unexpectedly strong semiconductor market exerts a greater influence.

Containers are piled up at Pyeongtaek Port in Gyeonggi Province. Photo by Yonhap News Agency

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The Bank of Korea announced on April 23 that the real gross domestic product (GDP) growth rate for the first quarter of this year (advance estimate, quarter-on-quarter) was calculated at 1.7%. This is the largest increase in five and a half years since the third quarter of 2020 (2.2%). It is nearly twice the forecast (0.9%) that the central bank presented in its economic outlook this February. Lee Dongwon, Director General of Economic Statistics Department 2 at the Bank of Korea, stated, “If you consider the performance of the two leading semiconductor companies, their first-quarter results either surpassed or were close to last year’s annual results,” explaining, “The semiconductor market performed better than expected in the early part of the year, which is the main reason why the actual figure exceeded projections.”

South Korea’s economy turned negative (-0.2%) in the first quarter of last year but rebounded to 0.7% in the second quarter and 1.3% in the third quarter, raising hopes for recovery. However, it contracted again by -0.2% in the fourth quarter, resulting in annual growth barely reaching 1%.

This surprising surge in growth was driven by balanced improvements in exports, private consumption, and investment indicators. In particular, exports showed a strong increase led by semiconductors, private consumption improved, and both construction and facility investment turned positive-factors that contributed to the higher growth rate. Director Lee noted, “Private consumption has continued to grow in both the fourth quarter of last year and the first quarter of this year, even after last year’s distribution of consumption coupons. Semiconductor exports also performed better than expected, and these two segments made significant contributions.”

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Exports increased by 5.1% quarter-on-quarter, mainly due to IT items such as semiconductors. This marks a significant improvement after negative growth in the fourth quarter of last year. Imports also grew by 3.0%, led by machinery, equipment, and automobiles. Domestic demand continued its recovery, especially in the private sector, with construction and facility investment rebounding. Private consumption rose by 0.5% quarter-on-quarter, mainly due to increased demand for goods such as clothing. Government consumption inched up by 0.1%, mostly due to higher spending on goods. Construction investment rose by 2.8% over the same period, led by increased building and civil engineering works. Facility investment also grew by 4.8% as both machinery and transportation equipment saw increases. Both construction and facility investment, which had declined by -3.5% and -1.7% respectively in the fourth quarter of last year, reversed course and posted gains in just one quarter.

Director Lee explained, “Facility investment turned positive, led by increased investment in machinery for semiconductor and display manufacturing, and construction investment also improved due to semiconductor plant expansions and a rise in new housing starts-these factors contributed to the surprise growth in the first quarter.” However, he also pointed out that construction investment may still face risks, as issues such as soaring raw material prices could lead to cost problems.

Looking at the contribution of each expenditure item in the first quarter, the rebound in exports was striking. The growth contribution of net exports (exports minus imports) was 1.1%, a turnaround from -0.2 percentage points in the previous quarter. Although imports rose by 1.2 percentage points, exports increased by a much larger 2.4 percentage points, boosting the overall contribution. The contribution of domestic demand to growth rebounded from 0 percentage points in the fourth quarter of last year to 0.6% in the first quarter. Notably, the contributions from construction and facility investment both increased by 0.3 percentage points and 0.4 percentage points, respectively, further enhancing the impact of domestic demand. By economic agent, the private sector contributed 1.7 percentage points, which was higher than the government's contribution of 0 percentage points.

By industry, the improvement was especially clear in manufacturing and construction. Manufacturing expanded by 3.9% quarter-on-quarter, driven by computers, electronics, and optical equipment. Construction also grew by 3.9%, with both building and civil engineering projects increasing. Utilities (electricity, gas, water) rose by 4.5%, mainly due to increased activity in water and raw material recycling. All of these sectors returned to growth in just one quarter after declines in the previous quarter. The service sector also saw a 0.4% increase, mainly in finance and insurance, as well as culture and other services.

Real gross domestic income (GDI) in the first quarter climbed by 7.5% quarter-on-quarter, far outpacing GDP growth. This marks the highest growth since the first quarter of 1988 (8.0%) in 38 years. Director Lee explained, “This was the result of improved terms of trade, as export prices rose significantly, especially for semiconductors.”

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The downward pressure on growth caused by the Middle East war is expected to be fully reflected in indicators from the second quarter onward. Going forward, the key issue is how much the positive effect of strong semiconductor exports can offset the negative impact of the war. Director Lee commented, “The impact of the Middle East war was not significant in the first quarter. Until late March, ships from South Korea continued to pass through the Strait of Hormuz before and after the outbreak of the war. Simply put, the war affected only about ten out of ninety days in the first quarter, so the real impact will begin from April.”

Forecasts for South Korea’s economic growth this year vary by institution. The Organization for Economic Cooperation and Development (OECD) lowered its forecast from 2.1% last December to 1.7% in March, while the International Monetary Fund (IMF) has maintained its forecast at 1.9%. Director Lee noted, “It is true that the Middle East war has had a negative impact on economic growth, but even a brief look at the OECD and IMF forecasts shows that there is no consensus on the direction of the growth outlook. Despite the outbreak of the Middle East war, exports, especially of semiconductors, remain strong, and although consumer sentiment worsened in April, credit card monitoring through last week indicates that private consumption has not yet been affected. This is another variable to consider.” He added, “We also need to keep an eye on how effective government policies that take effect from the second quarter will be.”

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