Korea: Economic output shrinks in Q1 at sharpest pace since 2008
April 23, 2020
According to preliminary data released by the Bank of Korea, the economy contracted 1.4% in quarter-on-quarter seasonally-adjusted (qoqsa) terms in the first quarter, contrasting the 1.3% expansion in the final quarter of last year. The reading marked the sharpest contraction in economic activity since Q4 2008 but fared slightly better than the 1.5% contraction market analysts had anticipated. Moreover, the economy grew 1.3% in annual terms in the first quarter, down notably from 2.3% in the final quarter of last year and marked the weakest annual growth rate since Q2 2009.
The largest drop off in private consumption since the Asian Financial crisis over two decades ago primarily drove the sharp deterioration in the first quarter (Q1: -6.4% qoqsa; Q4: +0.9% qoqsa). Moreover, government consumption slowed from 2.5% in Q4 last year, to 0.9% in Q1, while gross fixed capital formation also softened from 4.5% growth in Q4 to 0.9% in Q1.
On the external front, exports of goods and services declined 2.0% quarter-on-quarter, contrasting the previous quarter’s 0.5% expansion. Similarly, imports of goods and services contracted 4.1% in the first quarter, down notably from the fourth quarter’s 0.6% increase.
The Korean economy was already on a weak footing heading into the pandemic, but domestic containment measures and disrupted supply chains are poised to weaken the economy further in upcoming quarters. Despite a robust effort to contain the virus domestically, the export-dependent economy is still projected to contract even more sharply in the second quarter, restrained by weaker global demand and a waning Chinese economy.
Nevertheless, government stimulus measures worth nearly USD 200 billion will support the flagging economy. Moreover, the Bank of Korea has also stepped in by cutting interest rates to historic lows, and rolled-out an unlimited asset purchasing program (quantitative easing) to buttress domestic financial markets. This should support a healthy rise in domestic demand once the pandemic subsides.
Commenting on the outlook for Korea’s economy , analysts at Goldman Sachs noted:
“We expect further weakness ahead and revise down our Q2 growth forecast to -2.0% qoq sa, from -0.6% previously. Most importantly, we are revising down our Q2 exports forecast, to reflect further sharp contraction in external demand […] We are now penciling in a stronger rebound in 2H for exports, but the lower base from 1H would lower the full year growth forecast to -3.0% (vs. -0.8% previously), the weakest in almost three decades.”
Author: Steven Burke, Economist