Korea: The economy holds up well in the fourth quarter due to government stimulus spending
According to preliminary data released by the Bank of Korea, the economy grew 3.1% in the fourth quarter compared to the same quarter a year earlier. This was significantly up from the 2.0% expansion recorded in the third quarter, although the lower Q3 reading was partly the consequence of a high base effect. In seasonally-adjusted terms, the economy expanded 1.0% in Q4 compared to the previous quarter, up from 0.6% in Q3. All growth figures were above market analysts’ expectations.
Government spending, which surged to a near-decade high of 7.1% (Q3: +4.6%), powered the expansion in the fourth quarter. This came as President Moon’s administration continued pursuing an accommodative fiscal approach in efforts to kick-start economic growth and create employment. Meanwhile, private consumption expanded 2.5% in Q4—as it did in Q3—likely supported by a lower unemployment rate in the quarter; consumer confidence, however, fell into negative territory for the first time in over one-and-a-half years. Fixed investment continued to show weakness in Q4, falling 3.9%, with lower investment spending on construction projects weighing on this latest outturn. Nevertheless, this was a less pronounced decrease than Q3’s 6.6% fall.
Exports of goods and services increased 6.5% in Q4, up from the 3.1% rise in Q3. Imports, meanwhile, grew 1.6% in Q4, contrasting the 1.8% decrease in Q3. Overall, the external sector contributed 2.6 percentage points to economic growth in Q4, matching the contribution in Q3, which was the highest since Q2 2013.
Looking ahead, government spending is set to continue rising strongly this year with the government’s budget proposal, which was passed on 8 December, scheduling a nearly 9.5% spending increase compared to 2018, the largest rise since 2009. Moreover, monetary policy will likely remain accommodative by historical standards, supporting fixed investment. A tight labor market should also support private consumption, but lackluster consumer confidence could limit spending increases. Meanwhile, elevated household debt, global economic headwinds and protectionism, and volatile oil prices all generally weigh on the outlook.