Buoyant Q1 data brighten South Korea’s economic outlook

What’s happened?

South Korea’s economy recorded a 1.3% expansion from the previous quarter in January-March; this was the strongest quarterly growth registered since the last quarter of 2021. Real economic output increased by 3.2% on a year-on-year basis. The buoyant performance beats both EIU’s forecast and the market consensus, paving the way for solid economic acceleration in 2024.

Why does it matter?

The robust real GDP growth in the first quarter represents a sharp improvement in economic momentum. In particular, the steady increase in private consumption will reduce pressure on the Bank of Korea (BOK, South Korea’s central bank) to start reducing the policy rate and will help the government to limit the scale of an anticipated fiscal package to relieve cost-of-living pressures. However, economic growth remains heavily export-driven, which leaves further expansion vulnerable to fluctuations in external demand.

The first-quarter upswing in private consumption indicates the resilience of domestic demand despite elevated borrowing costs. Household spending was heavily burdened by both strong inflation and tight monetary policy settings throughout last year. The data for January-March, when private consumption increased by 0.8% on a sequential basis, seem to indicate an inflection point, as consumer sentiment has been bolstered by improving wage growth. Although we expect private consumption to remain on a recovering path, the pace is likely to slow in the second quarter as inflationary pressure lingers, particularly for food products, and interest rates remain high.

Similarly, we expect the rebound in investment growth to peter out this year. The 1.5% sequential expansion in investment in January-March was largely propelled by a jump in construction activity. Such strong growth will be difficult to sustain amid high borrowing costs for construction companies and mortgage-holders alike and the absence of any relaxation in development rules.

The outlook for the external sector will stay bright in the remainder of this year, but its contribution to real GDP growth is set to narrow. Export growth will remain underpinned by an ongoing upswing in global demand for medium-to-high-end memory chips and electronic devices. This will be supported later in the year by restocking trends in the global inventory cycle and a recovery in consumer demand in China. We nevertheless consider the contraction in imports in the first quarter to be a temporary setback, as import demand will recover in line with growing manufacturing activity later in the year.

What next?

The surprise in the first-quarter economic data indicates improving economic conditions for South Korea. This will lead us to revise up our real GDP growth forecast for 2024 from 2.3% to 2.5%. This upward revision is nevertheless moderated by our view that the positive data will delay monetary policy easing and limit the scale of planned fiscal stimulus, which will in turn keep a lid on the recovery in private-sector demand.

The analysis and forecasts featured in this article can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.