South Korea’s Recovery Eased Last Quarter Amid Omicron Wave
South Korea’s Recovery Eased Last Quarter Amid Omicron Wave
(Bloomberg) -- South Korea’s economy decelerated to a more measured pace last quarter following an omicron outbreak and a jump in commodity prices, while remaining on track for a further tightening of monetary policy.
Gross domestic product advanced 0.7% from the final three months of 2021, when it expanded 1.2%, central bank data showed Tuesday. That slightly exceeded economists’ estimates, as did the economy’s 3.1% annual gain.
The result highlights the challenge for policy makers: supporting an economy that’s set to be buffeted by war in eastern Europe and widespread lockdowns in key trading partner China; yet also battling to stem inflationary pressure that’s mounting worldwide. The upshot is economists expect the Bank of Korea will raise interest rates further, having already hiked twice this year.
“Policy normalization is likely to stay on track,” said Yoon Yeo-sam, an analyst at Meritz Securities in Seoul. “The worry is the second half with inflation spilling into wages and putting pressure on businesses. The lockdowns in China and Europe’s geopolitical risks are additional concerns.”
Economists had expected consumption would take a hit in the first quarter due to virus cases among South Korea’s 50 million people reaching all-time highs.
President Moon Jae-in’s administration responded with its first extra budget of the year to minimize the economic hit, while reworking the quarantine strategy around the concept of living with the virus rather than toughening restrictions.
It may be paying off. BOK board member Joo Sang-yong said earlier this month that consumption appeared to be picking up from mid-March. Meanwhile, the rise in virus case is slowing sharply in recent weeks.
The momentum appears set to last into the April-June period with social distancing eased and exports holding up, Meritz’s Yoon said. Still, higher commodity prices are set to weigh on demand both at home and abroad, while a slowdown in China’s economy may crimp orders for Korea’s exports.
Like much of the developed world, South Korea has been grappling with rising consumer prices and soaring commodity and energy costs that are being exacerbated by Russia’s war on Ukraine.
Inflation topped 4% in March for the first time in over a decade. The BOK sees prices staying above its target of 2% this year, while estimating the economy will grow less than previously forecast.
“Fresh headwinds are mounting,” said Alex Holmes, an economist at Capital Economics. “The consumer recovery is likely to be tapered by the drags of high inflation and rising debt servicing costs.”
Today’s data showed investment in facilities and construction led the deceleration in economic growth, with the former declining by 4%.
Roughly two thirds of construction materials recorded price increases of more than 10% from the prior year in early 2022, according to a BOK study published last month. Overall prices increased 28.5% in the fourth quarter, underscoring the impact of higher commodity costs.
Today’s GDP report also showed private consumption fell 0.5%, while government spending was unchanged.
Overseas shipments were also resilient, increasing 4.1%. Indeed, with export growth outpacing imports, the contribution of net exports to quarterly growth was 1.4 percentage points.
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