Korea: Economy picks up momentum in Q4 as domestic demand benefits from fiscal stimulus
March 15, 2016
Korea’s economic activity gained further momentum toward the end of 2015 as strong domestic demand continued to support growth. GDP increased 3.0% in Q4 2015 over the same quarter of the previous year. The result, which was in line with market expectations, marked an acceleration over the 2.7% expansion registered in Q3 and was the fastest pace of expansion since Q3 2014. Due to Q4’s increase, the economy grew 2.6% in 2015 as a whole. That said, economic growth in 2015 came in below the 3.3% registered in 2014 as a slowdown in exports weighed on growth.
Domestic demand continued to benefit from a fiscal stimulus, which expired in December 2015 and was reinstated for another six-month period until June of this year. Consequently, private consumption increased 3.2% annually in Q4, which was faster than the 2.1% expansion observed in Q3. Private consumption has benefited from tax reductions on passenger-car purchases as well as from government-sponsored retail sales promotions. Moreover, gross fixed capital formation continued to show healthy growth in the final quarter of 2015 (Q4: +5.2% year-on-year; Q3: +5.1% yoy) and government consumption accelerated its pace of growth from 3.0% in Q3 to 3.9% in Q4, as the administration continued to increase its disbursement.
Exports of goods and services increased a lackluster 1.9% in Q4 (Q3: +0.3% yoy). On the other side of the balance, imports picked up from a 3.3% increase in Q3 to a 5.5% expansion in Q4. Due to the strong growth in imports, the contribution from net exports to overall economic growth continued to deteriorate in the final quarter of 2015. The external sector’s net contribution to growth fell from minus 1.4 percentage points in Q3 to minus 1.6% in Q4, which marked the worst drag on growth since Q2 2011.
Sequential data showed that the economy increased a seasonally-adjusted 0.6% in Q4, which came in below the 1.3% expansion tallied in Q3.
The government is seeking to achieve 3.0% growth in the forthcoming years through innovation and sustainable growth strategies that continue to focus on domestic demand. Analysts see, though, that such policies will take time to have any significant impact. Meanwhile, in February, Finance Minister Yoo Il–ho, who was newly appointed in January, announced his first economic package, that totals KRW 21.0 trillion (USD 20 billion), in order to continue to support economic growth. According to the government, the proposed stimulus is not new money, but rather front-loaded spending from the 2016 budget. The new finance minister is inheriting the same playbook from his predecessor, Choi Kyung-hwa, who is a key electoral candidate for the ruling Saenuri Party for the parliamentary election in April.
Author: Ricardo Aceves, Senior Economist