Korea: Economy records quickest growth since Q4 2019 in Q1, reaching pre-pandemic levels
According to a preliminary reading, economic activity rebounded in the first quarter. GDP increased 1.8% year-on-year, contrasting the 1.2% contraction logged in the fourth quarter of last year. Q1’s reading marked the strongest growth since Q4 2019 and brought GDP back to pre-pandemic levels, despite lingering Covid-19 restrictions.
Unlike Q4’s reading, which relied on exports, the upturn in Q1 was broad-based, with a notable recovery in domestic demand: Private consumption, public spending and fixed investment all gained steam. Household spending rebounded, growing 1.0% year-on-year in the first quarter, which marked the best reading since Q4 2019 (Q4 2020: -6.5% yoy), although the figure was flattered by a favorable base effect. Meanwhile, public spending edged up to a 2.6% increase in Q1 (Q4 2020: +2.3% yoy), benefiting from the ongoing expansionary fiscal stance and reaching a record high in real terms. In addition, strong chip exports prompted capital spending on facilities: Fixed investment growth improved to 3.7% in Q1, compared to the 1.2% increase logged in the prior quarter.
Growth in exports of goods and services accelerated to 4.5% year-on-year in the first quarter, which marked the best reading since Q1 2019 (Q4 2020: +1.2% yoy), amid surging demand for IT products. In addition, imports of goods and services bounced back, growing 3.1% in Q1 (Q4 2020: -2.8% yoy).
On a seasonally-adjusted quarter-on-quarter basis, economic growth improved to 1.6% in Q1, following the previous quarter’s 1.2% expansion.
Looking ahead, economic growth should strengthen later this year amid stronger consumer sentiment. However, lingering restrictions could keep a lid on momentum, while the chip shortage in the auto industry could further weigh on the recovery.
On the outlook, Jeong Woo Park, economist at Nomura, commented:
“A continued recovery in private consumption, solid export demand and firm business investment should underpin stronger economic growth in coming quarters. We maintain our 2021 GDP growth forecast of 3.6% and see growth risks as largely balanced.”
Meanwhile, analysts at Goldman Sachs were less optimistic, and see further stimulus ahead:
“First, we expect investment to pull back somewhat in Q2 from a pickup in momentum in Q1. Second, recovery in private consumption could slow incrementally on longer-than-anticipated social distancing restrictions. […] We continue to expect accommodative fiscal and monetary policy given weak private consumption and large slack in job markets. We continue to expect a fifth pandemic relief package to be implemented in H2.”