hankyoreh

Sung Tae-yoon, the presidential office’s policy chief, delivers a briefing on economic matters including the real GDP growth rate for the first quarter of the year from the presidential office on April 25, 2024. (Yonhap)

The announcement that South Korea’s GDP grew by 1.3% in the first quarter has sparked debate concerning whether this expectation-exceeding trend toward economic recovery will continue.
 
Some within the government are betting on growth in the mid-2% range for the year. Some experts, on the other hand, are cautious, citing domestic and foreign uncertainties. In particular, they note that the unexpectedly weak growth in the US economy, South Korea’s largest export market, should be a cause for alarm.
 
South Korea’s GDP grew by 1.3%, quarter-over-quarter, in the first three months of 2024, more than double the government’s estimate of 0.5% and market expectations of 0.6%. Both the Ministry of Economy and Finance and the presidential office held briefings to emphasize the favorable signal this growth sent about economic recovery immediately after the Bank of Korea released the preliminary figures on Thursday, highlighting the government’s excitement over the unexpected growth.
 
“We thought the growth in the first quarter could reach 1% at best,” an official from the Ministry of Economy and Finance told Hankyoreh on Sunday. “We couldn’t have foreseen the 1.3% figure at all.”
 
The unexpected growth has the government toying with an upward revision of its annual growth forecast, which is currently set for 2.2%.
 
“I think the growth path has been elevated a little bit, and there is a possibility that we will see growth in the mid-2% range on an annualized basis,” said a key Ministry of Economy and Finance official. “We expect the Organisation for Economic Co-operation and Development to revise its global economic outlook soon and raise its growth forecast for Korea.” 

A person fills up their motorcycle at a gas station in Seoul on April 28, 2024, as gas prices have climbed for five weeks and counting. (Kim Hye-yun/The Hankyoreh)

The government's revised growth forecast will be included in its economic policy directions for the latter half of the year, which are slated to be announced in July.
 
While optimism is prevalent among government officials, those in the market are more wary. Some note that the surprise growth in the first quarter of 2024 was possible due to temporary factors. The central bank also brought attention to “winter weather that was milder than usual” and “the effect of new mobile phone launches” at a press conference which took place after the announcement of the country’s GDP growth in the first quarter.
 
This analysis suggests that investment and consumption performed above expectations due to the warm weather, which has led to more construction site work and outdoor activities. Indeed, the contributions of private consumption and construction investment to first-quarter growth amounted to 0.4 percentage points each.

Some analysts also suggested the strong private consumption numbers are deceptive in that they reflect overseas consumption activities.

Once these factors are taken out of the equation, the South Korean economy is still faced with a reality of high prices and high interest rates. If anything, price concerns are deeper than expected earlier in the year, and the likelihood of interest rates remaining high in the long term appears slightly greater.

In particular, rises in oil prices and exchange rates as the Middle East faces a mounting crisis over the conflict between Iran and Israel have further fanned uncertainties.

“The uncertainties associated with inflation and oil prices are so high that it appears premature to see things as having shifted from the economic trends predicted earlier this year,” said Hanyang University economics professor Ha Joon-kyung.

These calls for a more cautious take are bolstered by the US’ announcement on Thursday of a first-quarter annual growth rate of 1.6%. Falling well below the 2.4% rate predicted by the market, the figure suggests that some dark clouds might be forming over the export improvement trend that has been powering South Korea’s growth.

The US represents South Korea’s largest export market.

The South Korean government is adopting a relatively cautious stance in response to the warning signals coming from the US. 

“When analyzing growth statistics from the US, it was the American export sector, rather than domestic consumption, that fell below expectations. In this regard, it’s difficult to say the situation will have an immediate impact on South Korea’s exports, which rely heavily on US consumption,” said a key government insider. 

There was also a notable disparity between the preliminary and tentative estimates concerning US growth.  

“Considering that sluggish US growth could negatively impact South Korea’s export sector, including semiconductors, it’s difficult to look at South Korea’s near economic future with optimism,” said Park Sang-hyun, an economist at Hi Investment and Securities Co.

“Now is not the time to relax. We need to wake up and prepare for what’s ahead.”

By Choi Ha-yan, staff reporter; Ahn Tae-ho, staff reporter

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