Korea's economy showed resilience in the first quarter of 2023, growing by 0.3% compared to the previous quarter, despite concerns over negative growth. Fueled by the lifting of mask mandates, the rebound in private demand helped prevent two consecutive quarters of negative growth. However, the export sector continues to face challenges, which may impact future economic growth. The Bank of Korea (BOK) had initially forecasted an annual growth rate of 1.6% for this year, but with the decline in exports, the projection is likely to be downgraded.
The BOK announced on Tuesday that Korea's real GDP grew by 0.3% in the first quarter of 2023, marking a bounce back after turning negative in the previous quarter for the first time in 10 quarters since the second quarter of 2020. The decline was attributed to a sharp drop in exports, which decreased by 0.4%.
The Korean economy's growth for the first quarter of 2023 was largely driven by private consumption, which surged from -0.6% to 0.5%. This was mainly due to a significant rise in domestic demands for entertainment, leisure, food, and accommodation services. According to the head of BOK's economic statistics bureau, lifting mask mandates led to an increase in face-to-face activities such as travel, concerts, and events, which boosted consumer spending. Analysis shows that private spending lifted the growth rate for the first quarter by 0.3 percentage points.
Korea's exports and imports have both increased by 3.8% and 3.5%, respectively, in the first quarter of 2023. This comes after exports sharply fell by 4.6% in the previous quarter. While exports have returned to positive growth this quarter, the accumulated trade deficit has pushed ‘net’ exports down by 0.1 percentage point. Unfortunately, the contribution rate of net exports to the country's growth has been negative for four consecutive quarters, the first time since the financial crisis between the second quarter of 1998 and the first quarter of 1999.
Korea's capital investment decreased by 4.0%, with the biggest drop seen in the area of equipment, including those related to semiconductors. This is the first time in four quarters that capital investment has decreased, and the decline is the sharpest since the first quarter of 2019, which saw a drop of 8.3%.
The Korean economy's growth for the first quarter of 2023 was a relief after it narrowly escaped negative growth, but challenges remain ahead. The BOK's Monetary Policy Board has cautioned in its monetary policy resolution that the country's annual growth rate may fall slightly short of the February forecast of 1.6% and could be downgraded in May. The BOK's warning of a potential growth downgrade in May is all the more concerning. It suggests that even with the anticipated revival of the economy in the second half of 2023, the annual growth rate may still be withering.