South Korea’s economic growth ticks up in second quarter

SOUTH Korea’s economic growth ticked up in the second quarter, led by a more favourable net export contribution, official advance estimates showed on Tuesday (Jul 25), slightly exceeding market expectations.

Gross domestic product (GDP) grew by a seasonally adjusted 0.6 per cent in April-June on a quarterly basis, according to the Bank of Korea, after a 0.3 per cent increase in the preceding three months.

It beat the median 0.5 per cent rise forecast in a Reuters survey of economists and marked the biggest quarterly growth since the second quarter of 2022.

By expenditure, exports fell 1.8 per cent, but imports dropped at a much faster rate of 4.2 per cent, bringing a net growth contribution of positive 1.3 percentage points to the heavily trade-reliant economy.

Private consumption as well as facility and construction investments were all weaker than the quarter before, down 0.1 per cent, 0.2 per cent and 0.3 per cent, respectively, while government spending dropped 1.9 per cent, the biggest since early 1997.

GDP for the quarter was 0.9 per cent higher than the same quarter the year before, compared with an expansion of 0.9 per cent in the January-March quarter and a 0.8 per cent increase expected by economists.

Asia’s fourth-largest economy is expected to grow 1.4 per cent in 2023, down from 2.6 per cent in 2022, according to the latest forecasts by the central bank and the government.

Still, concerns about the strength of momentum remain. Early trade data showed exports in July falling at the fastest clip since March, and uncertainties remain over the timing of any potential rebound in the key chip sector and a recovery of demand in China, Korea’s biggest trading partner.

“Reduced imports helped GDP come out to be a plus,” said So Jaeyong, an economist at Shinhan Bank. “It’s hard to give this figure a high rating.”

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Tuesday’s report underscored concerns about trade. Net exports were a big contributor to second-quarter growth, but only because exports weren’t as weak as imports. Also, government spending declined 1.9 per cent, the most since 1997, as the budgetary stance remained tight, and private consumption slipped moderately.

“All major components actually showed signs of decline,” Krystal Tan, economist at Australia & New Zealand Banking Group, said on Bloomberg TV. “The near term economic outlook looks quite challenging.”

One of the few bright spots was manufacturing, which showed signs of resilience.

The data may prompt the Bank of Korea (BOK) to shift its focus to growth from inflation, according to economists at ING led by Min Joo Kang. “We think today’s data should be a concern for the Bank of Korea as exports remain weak,” they said.

The BOK has kept its key interest rate steady, with a hawkish bias, for most of this year as it seeks to balance its inflation fight with the need to safeguard economic activity. 

ING said fiscal support may stay weak through the year, “considering the tax revenue deficit and normalization of covid related fiscal spending”.

Chang Jaechul, chief economist at KB Kookmin Bank, said private consumption poses a risk to the growth target while exports will likely keep improving on the back of recovering demand for electronics and technology products.

On the price front, headline inflation eased for a fifth month in June, but gains in the core price gauge have proven stickier than expected. While the pace of inflation may slow in July, price growth is likely to accelerate again to the 3 per cent level around the end of the year, according to the central bank.

The BOK kept its key rate unchanged this month for a fourth straight meeting, while noting that its inflation battle is still not over. The BOK has a target of 2 per cent inflation. REUTERS, BLOOMBERG