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Despite a decline in both government and private spending, South Korea’s GDP demonstrated a faster-than-expected growth rate in the period between April and June 2023, fueled by a positive contribution from the country’s net exports.
According to the Bank of Korea, the nation’s GDP increased by 0.6% quarter-over-quarter during the three months ended June 2023, surpassing the 0.3% growth recorded in the preceding three months. This 0.6% rise exceeded the initial predictions of experts, who had forecasted a growth rate of 0.5%.
However, between April to June 2023, South Korea experienced a decline of 1.8% in overall exports. While exports of automobiles and semiconductors increased, exports of petroleum and shipping services continued to fall. Simultaneously, the country’s imports witnessed a significant reduction of 4.2%, resulting in a positive impact on net exports.
“The upside surprise mainly came from a positive contribution from net exports (+1.3pt). However, we do not interpret this in a positive light, because it was not driven by an improvement in exports, but rather by a contraction of imports, which was deeper than that of exports,” said ING.
Meanwhile, private consumption dipped by 0.1%, with a fall in spending on services such as restaurants and accommodations between April-June 2023. During the same period, government consumption also slowed down by 1.9% as the government pulled back spending on social security benefits.
All in all, South Korea’s GDP growth rate for the first half of 2023 reached 0.9%, surpassing the Bank of Korea’s initial projection by 0.1 percentage point. Moving forward, the Bank of Korea anticipates a year-on-year GDP growth rate of 1.6% for the remainder of 2023, which is more optimistic than the IMF’s forecast of 1.5%.
Grim outlook for South Korea’s GDP growth
Despite positive growth in the most recent quarter, the outlook for South Korea’s economy, which is the fourth-biggest in Asia, looks bleak.
ING anticipates a continuation of the contraction in South Korea’s consumption throughout the second half of 2023. The financial services company bases its outlook on forward-looking data on domestic demand, which points to a further deterioration in domestic growth.
“Construction orders, permits, and starts have been declining for several months, while capital goods imports and machinery orders have also trended down recently…business sentiment for new investment is very weak. This year’s fiscal spending will also not support the economy meaningfully..,” said ING’s senior economist Min Joo Kang.
In addition, the high level of household debt compared to disposable income in South Korea poses a significant obstacle to the country’s future economic growth. As of 2021, this debt-to-income ratio has escalated to 206%, making it the fifth highest among all OECD countries.
“A key factor driving this debt ratio higher has been large mortgage lending flows for residential property purchases. Such a high household debt ratio creates macroeconomic vulnerability to significant monetary policy tightening, with Bank of Korea rate hikes during 2021-23 having increased financial pressures on highly leveraged households,” said Rajiv Biswas, Executive Director and Asia-Pacific Chief Economist at S&P Global.
Furthermore, repercussions of demographic ageing are also set to adversely affect South Korea’s GDP. The working-age population of people aged between 16 to 24 is expected to diminish as a proportion of the total population, declining from 71.4% in 2021 to a projected 55.7% by 2041.
According to S&P Global, the potential growth rate of South Korea may decline significantly due to demographic ageing. By the year 2050, this rate could potentially fall within the range of approximately 1% to 1.5% per year, due to demographic ageing.
