Korea: Korea's economy slows further in Q4
February 1, 2017
The Korean economy lost some momentum in the final quarter of 2016, growing at the slowest pace in a year and a half. GDP increased 2.3% annually in Q4, which came in below the 2.6% expansion in Q3 and represented the slowest pace since Q2 2015. In addition, Q4’s result was virtually in line with the 2.2% growth rate the markets had expected. A quarter-on-quarter comparison showed GDP—adjusted for seasonal factors—slowing from a 0.6% increase in Q3 to a 0.4% expansion in Q4.
The two main drivers behind the quarterly deceleration were private consumption and exports, which lost considerable momentum in Q4. Private consumption increased a lackluster 1.6% in Q4 (Q3: +2.7% year-on-year), which represented the slowest pace of expansion since Q1 2015. The year-on-year gains in private consumption from Q1 to Q3 came to a halt in Q4 as confidence among Korean households began to deteriorate toward the end of year on the heels of the corruption scandal that engulfed the President. Furthermore, government spending, although slowing marginally, saw a still solid 3.4% increase in Q4 (Q3: +4.0% yoy). Government consumption bolstered growth in H2 2016, buoyed by the fiscal stimulus measures the government introduced in Q2 and Q3. On a positive note, gross fixed investment accelerated in the final quarter to a 7.0% increase from a 5.3% expansion in Q3.
On the external front, the growth improvement seen in exports of goods and services in Q2 and Q3 came to an abrupt end, dropping markedly to just 0.5% in Q4. Imports followed suit and decelerated from a 5.0% increase in Q3 to a 2.0% expansion in Q4. The contribution from net exports to the economy was negative in Q4, subtracting 0.7 percentage points from overall GDP, following the 1.0 percentage-point drag in Q3.
The government, crippled by political turmoil, remains unable to implement the structural reforms needed to reorient the export-driven economy. While the political situation of impeached President Park Geun-hye still needs to be solved, Prime Minister Hwang Kyo-ahn will assume her functions and likely extend the fiscal support.
Author: Ricardo Aceves, Senior Economist