Korean economy dodges negative growth, yet recession risk remains

The Bank of Korea announced Tuesday that the Korean economy grew 0.3 percent in the first quarter of the year, up from negative 0.4 percent in Q4 2022, barely dodging negative growth for two consecutive quarters. Export and investment have been sluggish, but the increase in private consumption upon the lifting of the mask mandate drove a rebound in growth rate.

Although the economy has managed to avoid a negative spiral, there is no room for complacency. Private consumption was the de facto only contributor to the first quarter's growth, thanks to the lifting of the mask mandate, which in turn pulled spending, albeit by a small margin, on restaurants and hotels and revitalized travels and face-to-face interactions, such as festivals and live performances. However, consumption-led growth can only last so long, as price pressures and a rise in household debt due to high-interest rates continue to weigh on consumers.

Exports, the main axis for economic growth, has lost momentum, and the net export, the difference between imports and exports, has lowered the growth rate in the first quarter by 0.1 percentage point, reporting negative net exports for four straight quarters since 1999 immediately after the Asian financial crisis. A trade deficit that has lasted for 13 months is holding back the country’s economic growth.

There is no sign, however, of an improved growth outlook in the near future. A double-digit decline in South Korea’s exports has continued well into April because of the semiconductor industry slowdown and delayed spillover effect of China’s reopening. Business investment that can lead to growth remains weak. The equipment investment in the first quarter has been slashed by 4 percent, posting a four-year low. The survey data the Federation of Korean Industries released Tuesday showed a negative business outlook for 14 months. In particular, the business outlook for the electronics and telecom equipment market in May has hit the lowest level in 31 months.

With the Q1 growth that has posted zero growth, the Korean economy seems to be stuck in a long tunnel of recession. Domestic and global organizations including the IMF have lowered South Korea’s growth rate for 2023 to 1.5 percent, and the Bank of Korea also implied that it would adjust downward the last month’s forecast of 1.6 percent. The government should brace for the worst-case scenario by discarding a rosy, yet unrealistic, outlook for the second half of the year and strengthening an exigency strategy. Instead of readily mobilizing fiscal resources to revive the economy, the government must revitalize private investment and embark on a structural overhaul with the aim of strengthening the economic fundamentals.


Min-Woo Park minwoo@donga.com