The Korean economy grew only 0.7% in the first quarter of this year (January to March), and sank again to ‘growth in the 0% range’. In the aftermath of the ‘omicron mutation’ pandemic and a surge in prices, consumption and investment all took a step backward, except for exports.
There are concerns that the Korean economy may fall into stagflation (inflation rises amid economic downturn) as even the growth engine is cooling while inflation, interest rates and exchange rates rise at the same time due to the Ukraine crisis and U.S. austerity measures. .
According to the Bank of Korea on the 26th, real gross domestic product (GDP) in the first quarter rose 0.7% from the previous quarter. After rising to 1.2% in the fourth quarter of last year (October to December), it fell 0.5 percentage points in one quarter and fell to the 0% level.
The poor performance in the first quarter was largely due to a contraction in domestic demand such as consumption and investment. Private consumption decreased 0.5% due to strengthening social distancing following the spread of Omicron. Construction investment, which had grown by 2.9% in the previous quarter, lagged behind it by 2.4%.
In particular, facility investment fell by 4.0% due to disruptions in the global supply chain and rising raw material prices. This is the lowest level in three years since the first quarter of 2019 (-8.3%). The effect of large-scale fiscal input disappeared, and government consumption remained at 0%. Accordingly, private consumption and facility investment lowered the growth rate of the first quarter by 0.2 percentage points and 0.4 percentage points, respectively.
However, exports were the driving force behind the growth. Exports grew 4.1%, mainly in semiconductors and chemical products. Imports also rose 0.7%, boosting net exports by 1.4 percentage points. The BOK estimated that the annual growth rate of 3.0% could be achieved by growing at a rate of 0.6-0.7% per quarter for the remaining 2nd and 4th quarters.
However, concerns are growing that exports will suffer as the situation in Ukraine is prolonged and China’s lockdown measures are spreading. As China is implementing lockdown measures to Beijing, Shenzhen, and Shanghai, the Korean economy, which is highly dependent on China, will inevitably be affected.
The weakening of the won due to the US high-intensity austerity policy and inflation rising to the 4% range are also considered as factors that will hinder growth. On that day, the won-dollar exchange rate rose 0.9 won (the won’s value decreased) and closed at 1250.8 won. This is the first time in two years and one month since March 23, 2020 (1,266.5 won), it broke the 1,250 won mark based on the closing price. A weak won can lead to a vicious cycle of raising import prices, exacerbating inflationary pressures.
Major domestic and foreign institutions have already lowered their domestic growth forecast for this year to 2%. The International Monetary Fund (IMF) lowered it from 3.0% to 2.5%. Standard & Poor’s (S&P), an international credit rating agency, forecasts a CAGR of 2.4% from this year to 2025. The BOK is highly likely to lower its growth forecast for this year to the 2% level in its revised economic outlook to be released next month. Ahn Dong-hyeon, a professor of economics at Seoul National University, said, “Uncertain external conditions continue to have a negative impact on exports.
Reporter Park Min-woo minwoo@donga.com
