Korean Economy Joins China in Surpassing Pre-Pandemic Peak
South Korea led the developed world to join China in exceeding the size of its pre-pandemic economy, as investment and exports helped it expand faster than expected.
Gross domestic product grew 1.6% during January-March from the previous quarter, the Bank of Korea said Tuesday, easily beating economists’ consensus for a 1.1% expansion. That pushed GDP above the level at the end of 2019, before the coronavirus hammered activity.
Among developed economies, Korea’s recovery appears the fastest and the milestone of recovering all output lost during the pandemic came a quarter earlier than expected, the finance ministry said in a statement. China exceeded that level already in 2020, while the U.S. is on track to reach the mark sometime this year.
While vaccinations have helped flatten the infection curve in some countries, the latest crisis in India suggests no country is immune to sudden flare-ups that put the economy at risk.
Korea has been one of the better economic performers throughout the pandemic, thanks to strong overseas demand for its products ranging from chips to cars. Investment overtook exports in the first quarter as the key growth driver, with businesses pumping more money into production.
From the previous quarter, facilities investment jumped 6.6% while exports increased 1.9%. Government spending was up 1.7% and private consumption rebounded 1.1%. From a year earlier, overall GDP increased 1.8%.
Acting Prime Minister Hong Nam-ki said the country is on track to achieve growth in the mid-to-upper 3% range, higher than the 3.2% earlier forecast.
The first-quarter growth “proves the economy’s ability to recover is relatively solid,” Hong said on Facebook following the GDP release. Still, jobs remain a concern for the economy, with groups such as the young and women still facing difficulties, Hong said.
The faster expansion led to a flurry of 2021 outlook upgrades by economists by around 0.3 to 0.4 percentage points. Citibank Korea now expects 3.6% growth, while Samsung Securities sees 4.3% and SK Securities 3.7%.
What Bloomberg Economics Says..
“The export sector continued to support the outlook, with robust external demand boosting capital expenditure. But a slower rebound in private consumption means policy makers will probably be inclined to remain accommodative to safeguard the recovery.”
-- Justin Jimenez, Asia Economist
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Despite the positive outlook, economists cite local outbreaks as a key risk to growth. Korea has found it more difficult to peg back fresh infections this year and inoculations are yet to start for the broader public. A full recovery in the job market is a way off as social distancing rules are still restricting the services industry.
“Investment is picking up in sectors that didn’t do so well last year as well as in ones that did,” said economist Oh Jae-young at KB Securities. “If consumption stabilizes, the momentum could keep on going.”
Policies remains supportive, without a hint of tapering stimulus in official circles. The fifth extra budget since the start of the pandemic was passed in March and a ruling party lawmaker last week floated the idea of a universal cash handout to boost consumption. BOK’s Governor Lee Ju-yeol has repeatedly dismissed speculations of early tightening.
“Strong external demand has led Korean firms to invest in more capacity and exports went from strength to strength last quarter,” wrote Alex Holmes, an economist at Capital Economics who correctly forecast the GDP outcome. “The main weak point of the economy is private consumption,” Holmes said, adding that any consumer recovery will be partial until the virus is all but eliminated.
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