Korea Exports (G&S, ann. var. %)

Economy records sharpest contraction since Q2 2020 in Q4

According to a preliminary reading, GDP dropped 0.4% on a seasonally adjusted quarter-on-quarter basis in the fourth quarter, contrasting the 0.3% expansion logged in the third quarter. Q4’s reading marked the worst since Q2 2020.

The downturn was driven by weakening private consumption, fixed investment and export activity. Household spending contracted 0.4% in Q4, marking the worst result since Q1 2022 (Q3: +1.7% s.a. qoq), while fixed investment growth waned to 0.7% in Q4 from 3.0% logged in the prior quarter. Government consumption, meanwhile, improved to a 3.2% expansion in Q4 (Q3: +0.1% s.a. qoq).

Exports of goods and services contracted 5.8% in Q4, marking the worst reading since Q2 2020 (Q3: +1.1% s.a. qoq). In addition, imports of goods and services deteriorated, contracting 4.6% in Q4 (Q3: +6.0% s.a. qoq), marking the worst reading since Q2 2020.

On an annual basis, economic growth moderated to 1.4% in Q4 from the previous quarter’s 3.1% growth. Q4’s reading marked the worst reading since Q4 2020.

The contraction in Q4 was due to tightening financial conditions at home—amid elevated inflation and rising interest rates—and weaker economic growth abroad, particularly in China.

Looking forward to Q1 2023, our panelists expect GDP to rebound. Inflation will continue to trend downwards, and the Bank of Korea has likely reached the end of its hiking cycle, easing pressure on household purchasing power. In addition, the global economy appears to be performing more strongly than earlier anticipated, in part due to resilient activity in Europe. This bodes well for the external sector. A key factor to watch will be the reopening of China—one of Korea’s key export markets—which could significantly boost exports ahead.

Nomura’s Jeong Woo Park commented on the GDP outlook:

“As we believe the worsening housing market will exacerbate the downward pressures on consumer spending, we expect GDP to contract again in Q1, led by worsening domestic conditions amid slowing export growth, prolonging the growth contraction until Q3. Indeed, with a rising financial burden, we expect the consumption-led recession to emerge for the first time since 2003. That said, to reflect the effects from China’s reopening and a likely supplementary budget in H2, we revise up our 2023 GDP growth forecast slightly to -0.4% from -0.6%.”

ING’s Min Joo Kang said:

“With a fairly sharp contraction last quarter, we revised up the first quarter GDP forecast slightly, mainly on the back of a technical rebound. But we still think that GDP for this quarter will contract or at best stagnate. The contribution to net exports is expected to improve mainly due to a sharper decline in imports, but domestic demand is expected to worsen. Private consumption is likely to shrink, while investment is also expected to decline. Thus, we maintain our annual GDP growth forecast of 0.6% year-on-year in 2023.”