Korea: Strong investment and exports growth reignite Korean economy
April 27, 2017
The Korean economy kicked into higher gear after sluggish growth in the second half of 2016, shrugging off concerns of an economic fallout following months of domestic political turmoil. GDP surprised to the upside and rose 2.7% annually in Q1—markets had expected a milder 2.6% increase—which came in above the 2.4% recorded in the previous quarter. A quarter-on-quarter comparison also highlighted the pickup in economic activity. GDP rose 0.9% in seasonally-adjusted quarterly terms in Q1, almost doubling the 0.5% expansion logged in Q4. Strong exports and capital investment helped put the economy on a solid footing at a time when policymakers are facing myriad economic and geopolitical challenges.
The economy’s resilience stemmed from better performances in the manufacturing and exporting sectors. Improved dynamics on the back of newfound overseas demand fueled a surge in capital outlays, with fixed investment growing at the fastest pace since March 2010 (Q1 2017: +9.5% year-on-year; Q4 2016: +7.1% yoy). Investment also soared in the construction sector as it benefited from benign weather and increased public infrastructure spending. Gains in private consumption, albeit existent—household consumption accelerated from a 1.5% increase in Q4 to a 2.0% expansion in Q1—remained subpar due to downbeat sentiment among consumers and concerns over high levels of household debt. Government consumption, after having bolstered growth in H2 2016, took a backseat this time around and grew at its slowest pace in a year and a half.
On the external front, improved demand for Korean products, particularly semiconductors, automobiles and petrochemicals, drove a pickup in export volumes, which accelerated to a nearly four-year high of 3.7% in Q1 (Q4 2016: +1.2% yoy). Nonetheless, the increase in exports was outstripped by even higher growth in import volumes. Imports rose from 3.3% in Q4 to 9.4% in Q1, thus driving the contribution from net exports to the economy deeper into negative territory. The external sector subtracted 2.7 percentage points from overall GDP in Q1, following the 1.0 percentage-point drag in Q4.
Government officials may decide not to roll out an additional budget this year as the economy seems to be firming up. The robust start to the year will provide a much-needed boon for policymakers as the country prepares to elect a new president in May amid mounting geopolitical turmoil in the Korean peninsula.
Author: David Ampudia, Economist