The Bank of Korea announced yesterday that the Korean economy’s growth rate in the first quarter of this year was only 0.7% compared to the previous quarter. Compared to the previous quarter, the fourth quarter of last year (1.2%), it was 0.5 percentage points lower. Considering the rapid spread of the Omicron mutant virus, such as the number of new confirmed cases of COVID-19 surpassing 400,000 during this period, it is evaluated that even this much was done.
However, looking at the contents, it seems difficult to see that the future is bright. Among the three drivers of growth, exports increased by 4.1%, but consumption and investment were very sluggish. Private consumption decreased 0.5% QoQ, and facility investment (-4%) and construction investment (-2.4%) also showed a sharp decline. Consumption and investment have been hit hard by the Omicron proliferation. When looking at the contribution of each sector to growth, consumption and investment were -0.7 percentage points, while net exports (exports – imports) were analyzed to be 1.4 percentage points. It can be said that domestic demand did not contribute to growth and grew alone, relying only on exports.
The problem is that exports are expected to be difficult after 2Q due to the prolonged Ukraine crisis and the lockdown of major cities in China. Considering that Russia’s invasion of Ukraine was on February 24, the impact of the Ukraine crisis is expected to begin in earnest from the second quarter. In fact, Hyundai Motor’s Russia plant in St. Petersburg, which produces 230,000 cars a year, has stopped operating, and Russia is also concerned about putting Korea on the list of unfriendly countries. In addition, China has been locking down Shanghai, its economic capital, for almost a month due to the spread of Omicron. In recent years, the situation is getting worse, with the Chaoyang District of Beijing City, which has a population of 3.5 million, virtually put into lockdown. Considering that China is Korea’s largest export market and source of parts and materials, it is feared that it will take a big hit on exports in the future.
This year, the Korean economy is facing a difficult situation with the growth rate slowing down and inflation rising. The International Monetary Fund (IMF) recently lowered its growth forecast for Korea to 2.5% and raised its consumer price forecast to 4%. Low-growth and high-inflation measures are urgently needed. We need to find a way to stimulate consumption and investment without stimulating inflation. It is time for the new government’s economic team, including Deputy Prime Minister Nominee Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong, to put their heads together and work out their wisdom.
