Export rebound offseting weak domestic demand, says KDI report

Containers stacked up at a port in a port in Busan on Friday. [NEWS1]

Korea’s economy is contracting slower as a rebound in exports offsets weak domestic demand amid high interest rates.

The country saw a growth in all-industry production, driven by a recovery in the mining and manufacturing industry, though the service industry continued to stay sluggish, according to a monthly economic assessment report by the state-run think tank Korea Development Institute (KDI) on Sunday.

Industrial production showed a sharp growth increase amid a continuous rebound, demonstrating 12.9 percent on-year growth in January, up from the previous month's 6.1 percent, amid sharp growth in semiconductors and automobiles.

Chip production, which accounts for 20 percent of Korea’s exports, jumped 44.1 percent on-year in January, while automobile production rose 13.2 percent over the cited period. Adjusted for seasonality, industrial production growth reached 5.8 percent.

The KDI reported that services production rose 4.4 percent on-year in January from 0.9 percent the previous month due to base effects and 2.5 additional working days. Seasonally adjusted, it grew 0.1 percent, “indicating sluggishness.”

“The value of construction exhibited a temporary uptick, yet both consumption and equipment investment continue to stagnate under the strain of high interest rates,” the report said.

Construction production jumped 17.6 percent in January, primarily due to the momentum from construction projects nearing completion. However, the KDI projects the high growth to face adjustments moving forward.

The think tank cited several uncertainties weighing on Korea’s economy, including weak domestic demand, high delinquency rates on household and business loans, and a sharp increase in agricultural products due to supply-driven inflation.

Grocery prices soared 6.7 percent in the first two months of 2024 compared to the same period last year, according to Statistics Korea data. It was the steepest growth in three years in the given period and attributed to adverse weather conditions.

That, along with a growth in petroleum products prices, contributed to the rebound in headline inflation, which bounced back to 3.1 percent in February on-year from 2.8 percent the previous month.

“Consumer prices experienced an accelerated rate of increase as supply-side inflationary pressures intensified, although underlying inflation continued to decelerate,” the KDI said.

Geopolitical risks have contributed to rising oil prices, slowing the drop in petroleum product prices. The extension of production cuts by OPEC+ may impede future slowing of inflation, the KDI added.

The government said that consumer prices are projected to ease at a slower pace than expected before reaching the target inflation of 2 percent by the end of 2024.

Korea’s prices are expected to grow 2.6 percent this year, according to the Ministry of Economy and Finance.

BY JIN MIN-JI [jin.minji@joongang.co.kr]