Explainer: How Korea notched the second-biggest GDP upgrade after the U.S.

Economy

Published: 28 May. 2024, 07:00 Updated: 28 May. 2024, 13:18

Explainer: How Korea notched the second-biggest GDP upgrade after the U.S.

Consumers shop for ramyeon products in a large supermarket in Seoul. Ramyeon emerged as a main export item, with outbound shipments of instant noodles hitting record highs nearly every month entering this year. [NEWS1]

Korea’s economic and business scenes unfold in such an intricate way that the headline numbers and official statements fall short of explaining what is really happening and why it matters. The Korea JoongAng Daily’s Explainer series aims to address the largely-unmet yet crucial need with an angle relevant to our readers across the globe. — ED

Korea pulled off a major surprise with a 0.4-percentage-point-or-higher uptick in its growth projections by various economic institutions at home and abroad, one of the steepest among advanced economies.

The rapid upturn runs in sharp contrast to the sentiment prevalent earlier this year, as worries over sluggish domestic demand, geopolitical uncertainties and a record level of household debt prompted many policymakers and market forecasters to gauge the country's growth in the low 2 percent range.

Notably, the Organisation for Economic Cooperation and Development (OECD) significantly upped its growth projection for the country's gross domestic product (GDP) this year from 2.2 percent to 2.6 percent, with Korea and the United States sharing the strongest forecast among advanced economies on the list. The scale of the upward adjustment was also one of the steepest, second only to the 0.5-percentage-point hike for the United States, and double the 0.2-percentage-point increase for the global economy.

What is behind Korea’s sudden expectation-beating growth? With the latest preliminary data far outpacing previous forecasts from various policymakers and market experts, what factors caught them so off guard? Will the first quarter's strong growth momentum last through the remainder of the year?

The Korea JoongAng Daily explored lingering questions behind a series of projection adjustments for Korea's economy as the country navigates a still-rocky, yet seemingly less-murky road ahead.

Q. Why such a steep revision?
A. Robust exports, as expected, drove the growth, albeit at a stronger clip than initially thought. What was unexpected was domestic demand, which has been slow since the second quarter last year, weighed down by high interest rates.

The Bank of Korea (BOK) recently lifted its forecast from 2.1 percent to 2.5 percent. Of the 0.4-percentage-point hike, 0.3 percentage points were attributed to the growth in exports, and the remaining 0.1 percentage point to domestic demand, which includes private consumption and investment.

The stronger-than-expected 1.3 percent GDP growth in the January-March period from the previous quarter has certainly turned the tide, coming in at the steepest pace since the 1.4 percent posted in the fourth quarter of 2021.

BOK Gov. Rhee Chang-yong said that the central bank missed a decrease in energy imports caused by warm weather during the winter due to a delay in compiling trading data. The uptick in domestic demand was partially attributed to the release of a new smartphone from Samsung Electronics and an increase in government spending.

The Korea Development Institute (KDI), a state-run think tank, adjusted its projection from 2.2 percent to 2.6 percent.

Kim Ji-yeon, head of economic trend statistics at the KDI, explained that “we cannot really pinpoint a single decisive factor behind the robust exports; rather, the steep surge in chip demand, the strong economy of the United States, one of Korea's biggest trading partners, and a faster-than-expected rebound in the Chinese economy seem to have played roles."

Investment banks have also made quite the revisions: Barclays raised the figure from 1.9 percent to 2.7 percent, Goldman Sachs from 2.2 percent to 2.5 percent, J.P. Morgan from 2.3 percent to 2.8 percent, and BNP Paribas from 1.9 percent to 2.5 percent. As a result, the median figure for economic forecasts by global institutions increased from 2 percent to 2.5 percent.

The OECD also noted that "growth is projected to strengthen," citing strong exports driven by chip demand, and suggested that "private consumption and investment are expected to rebound from late 2024, as interest rates start to decline."

How did the domestic demand readings improve in the first quarter?

Bank of Korea Gov. Rhee Chang-yong bangs the gavel during the Monetary Policy Board meeting in central Seoul last Thursday. [JOINT PRESS CORPS]

Private consumption logged 0.8 percent growth in the first quarter compared to a 0.2 percent expansion in the previous quarter as expenditures on goods and services rose. Government spending climbed 0.7 percent compared to a 0.5 percent gain in the previous quarter. Moreover, construction investment jumped 2.7 percent over the cited period, the steepest rise since the 4.1 percent logged in the fourth quarter of 2019.

The sign of a recovery in domestic demand is certainly "good news," as Rhee put it, but the BOK remains cautious as to whether the growth will continue in the second quarter.

The KDI's Kim also pointed out that "it is still too early to determine whether the better-than-expected growth in private consumption means that domestic demand is growing strong," saying that "retail sales have been in the negative since 2022 and are still weak, not to mention that service production is also increasing at a very slow pace."

How would this affect Korea’s monetary policy?
The strong GDP growth may spell further delays in rate cuts this year, especially with the U.S. Federal Reserve dragging its feet amid stubbornly strong inflation.

The BOK held the interest rate at 3.5 percent in May, freezing the key rate for the 11th straight meeting. The governor mentioned that five out of six members of the Monetary Policy Board preferred to keep the rate steady for the next three months, while one member was open to the possibility of cutting rates.

However, the central bank expects that this year's inflation will not be significantly affected by the increase in the growth projection, saying that still-sluggish domestic demand will offset the burgeoning inflationary pressure.

The annual projection for headline inflation by the BOK was kept at 2.6 percent, and core inflation at 2 percent.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]