Korea: Economy slows sharply in first quarter
April 26, 2016
South Korea’s economic activity sowed notably in the first quarter due to the fact that weak external demand continues to weigh on the external sector, while domestic demand showed a drastic deceleration. According to preliminary data, GDP increased 2.7% in Q1 over the same period last year, which was down from the 3.1% expansion observed in Q4. The deceleration was widely expected as analysts had seen the economy increasing 2.6%. Sequential data confirm the deceleration suggested by the annual data. GDP increased 0.4% over the previous quarter in Q1 in seasonally-adjusted terms, which came in below the 0.7% expansion registered in Q4.
On the domestic front, private consumption grew 2.1% year-on-year in the first quarter, which marked a deceleration compared to the 3.3% expansion tallied in Q4. In addition, gross fixed investment slowed substantially from a 5.4% increase in Q4 to a 3.1% expansion in Q1. The only bright spot in Q1 was government spending, which increased 4.5% in Q1 and followed a 3.9% expansion in Q4.
Meanwhile, tumbling external demand at the beginning of the year affected Korean exports of goods and services. Overseas sales of goods and services were virtually flat in Q1, growing only 0.1% (Q4: +2.5% yoy). On the other side of the balance, imports decelerated notably in the first three months of the year, reflecting slower domestic demand. Imports slowed from a 6.1% increase in Q4 to a 1.5% expansion in Q1. As a result, net exports continued to be a drag on the economy. The deterioration in the external sector subtracted 0.7 percentage points to overall economic growth in the first quarter, which followed a 1.6 percentage-point detraction in Q4.
Author: Ricardo Aceves, Senior Economist