Q1 GDP growth hit a 17-month high, will South Korea's economic miracle end?

Mars macroscopic

2024-04-29 06:00Published in Hunan Finance and Economics Creators

Executive Summary:

In the first quarter of 2024, South Korea's GDP grew by 1.3% quarter-on-quarter and 3.4% year-on-year. Spot GDP, which includes inflation, rose 6% year-on-year. However, the Bank of Korea warned that the country's economic growth will slow significantly because inflation may undermine sustained economic growth and the traditional economic development model will be challenged by a shrinking population.

1. South Korea's GDP growth rate in the first quarter hit a 17-month high.

On April 25, data released by the Bank of Korea showed that in the first quarter of 2024, South Korea's real gross domestic product (GDP) flash value increased by 1.3% quarter-on-quarter, the first quarter-on-quarter growth rate exceeded 1% in two years and three months. This represents a year-on-year increase of 3.4%. Spot GDP, which includes inflation, rose 6% year-on-year.

The Bank of Korea believes that the expansion of consumption has played a role in boosting the Korean economy. Private consumption increased by 0.8% quarter-on-quarter in the first quarter (comparable prices, the same below). In addition to the effect of the launch of Samsung Electronics' latest smartphones, the restaurant and accommodation industry is also in high demand. This reflects an improvement in consumer psychology in anticipation of an improving economy and lower interest rates.

In 2023, the burden of home loans on households due to high real estate prices and rising interest rates in South Korea will be the main reason for the sluggish consumption. Zhu Yuan, director of the Institute of Modern Economics, pointed out: "In 2023, consumers will take a wait-and-see attitude. In the first quarter of this year, consumption expanded due to the launch of new smartphone products."

Signals of improved consumption have stimulated companies to expand their production. South Korea's construction investment increased by 2.7% in the first quarter from the previous quarter. In the previous quarter (October ~ December 2023), this data fell sharply by 4.5%, and it is now rebounding. The better winter weather and the more large-scale works completed also had a positive effect. In terms of exports, they increased by 0.9% quarter-on-quarter, marking the sixth consecutive month of growth. Among them, exports of IT equipment increased by 0.9%.

Second, the Bank of Korea warned that the country's economic growth would slow significantly.

Despite the impressive growth of South Korea's economy over the past few decades, the Bank of Korea's warnings of a slowdown in annual growth still cast a shadow over the future of the economy.

The Bank of Korea believes that the expectations indicate a significant slowdown in the country's economic growth compared to the strong growth rate seen in the South Korean economy over the past few decades.

One reason is that inflation can be detrimental to sustained economic growth.

A growing number of South Koreans are concerned about the price outlook, believing that sticky inflation may hinder a sustained economic recovery. Regarding future price trends, the Bank of Korea cited the sharp rise in oil prices due to tensions in the Middle East as a cause for concern. Zhu Yuan of the Institute of Modern Economics said that "if the policy rate cut is delayed, it will become a headwind for the continued recovery of consumption."

In South Korea's parliamentary election (MP election) held on April 10, the ruling party suffered a crushing defeat due to rising prices of agricultural products and other products that focused on voters' criticism of the Yoon Suk-yeol administration. The opposition parties have called for a support fund of 250,000 won per person for all citizens to compensate for the damage caused by rising prices to national consumption, and pledged to coordinate and consult with Yoon Suk-yeol to implement this policy as soon as possible.

However, an official from the South Korean presidential office said that "if domestic demand is already quite stable, if policies to stimulate consumption are adopted, price pressure will increase."

In March 2024, South Korea's annual inflation rate remained stable at 3.1%, in line with market expectations. This is the highest reading since December due to rising fresh food and energy costs. On a monthly basis, month-on-month CPI slowed to 0.1% from 0.5% in the previous month, below market expectations of 0.3%.

The second reason is that the traditional economic development model is facing the challenge of shrinking population.

South Korea's corporate structure is peculiar, with traditional growth engines led by manufacturing and large conglomerates facing growing challenges, and there are concerns that the country still relies on outdated growth models in the context of the demographic crisis.

South Korea's total fertility rate is declining and it is facing a looming demographic crisis. In 2000, South Korea's total fertility rate was 1.48, higher than Japan's 1.3 and China's 1.22. It fell to 1.0 in 2017, 0.98 in 2018, and 0.92 in 2019. South Korea's total fertility rate slipped to a record low of 0.84 in 2020, marking the third consecutive year that South Korea's total fertility rate was below 1. That's a third lower than Japan's 1.34 and China's 1.3.

Studies have shown that for South Korea's population to remain stable, a total fertility rate of 2.1 is required. It is alarming that South Korea's ultra-low total fertility rate continues to hit record lows, falling to an all-time low of nearly 0.7 in 2023.

South Korea's birth rate in 2023 is about 4.55 per 10,000, much lower than China's 5.58 and Japan's 6.37.

By 2050, the country's working-age population is expected to fall sharply, and GDP will also fall. At the same time, shrinking labor forces pose a major challenge to support economic growth and underscore the urgent need for structural reforms that address productivity and demographic issues.

The third reason is that there are doubts about whether the AI boom can guide South Korea's economy to sustained growth.

Some stakeholders are pinning their hopes on the boom in AI to revive South Korea's semiconductor industry and address broader economic challenges.

However, despite existing structural constraints and political impasse, there are still doubts about the country's ability to effectively capitalize on AI-related opportunities.

On the outskirts of Yongin, 40 kilometers south of Seoul, South Korea is preparing for what the president calls a global "semiconductor war." South Korea's semiconductor industry's massive investment of $471 billion in Yongin will be used to build a large number of chip manufacturing facilities, underscoring the strategic importance of South Korea's leading industry.

The ambitious project, led by chipmaker SK hynix, is investing up to $91 billion to build the world's largest three-story semiconductor manufacturing facility.

At the same time, Samsung Electronics has invested $220 billion in the same field. Korean semiconductor companies are struggling to maintain their dominant position in the semiconductor industry amid increasing global competition.

South Korea's government's involvement in overseeing these developments reflects the country's growing concern about potential challenges to its chip industry supremacy.

While the investment in Yongin is seen as critical for South Korean chipmakers to maintain their technological edge and meet the growing demand for AI-related equipment, economists remain concerned about this broader economic model. The development of the semiconductor and artificial intelligence industries has a series of negative effects such as stifling creativity, leading to social inequality and widening regional disparities, indicating that the country needs to carry out comprehensive reforms to unleash its economic vitality.

Third, international institutions also continue to be optimistic about South Korea's economic development and have raised their economic growth forecasts.

However, perhaps the bystanders are clear, and the authorities are confused. As a small country with a population of 51.44 million, South Korea's financial resources and market are still unlikely to support the balanced development of its industries under the premise that its national economy ranks among the top 10 in the world. Concentrating on its advantageous industries and maintaining its leading position should be a wiser economic development strategy for South Korea, which is highly integrated into the global supply chain.

The problem of population shrinkage is a common problem and trend in developed countries, and it is more obvious in South Korea. However, Saburo believes that the problem of labor shortage caused by population may not be a problem with the rapid development of artificial intelligence and robotics industries, and the only problem with population shrinkage may be that the growth of the consumer market is slowing down due to the shrinking population base. But for South Korean multinationals, which rely heavily on the global market, the market is still vast.

International institutions also continue to be optimistic about South Korea's economic development. The Korea International Financial Center reported that UBS had raised its forecast for South Korea's economy to 2.3% from 2.0%. Similarly, Citi raised its forecast to 2.2% from 2.0% and HSBC raised its forecast to 2.0% from 1.9%.

The Bank of Korea forecasts GDP growth of 2.1% for the full year of 2024. On April 25, Sung Tae-yein, head of the policy office of the South Korean presidential office, hinted at the possibility of raising the full-year forecast. He stressed that South Korea's economy "has returned to the dynamic growth led by the private sector."

[Author: Xu Sanlang]

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Personal opinion, for reference only