[Yoo Choon-sik] Worrying signals from 2023 GDP data

South Korea’s economy grew 2.2 percent in real terms during the final quarter of last year compared to the same period in 2022, marking an acceleration from a 1.4 percent rise in the third quarter and bringing growth for the entire of 2023 to 1.4 percent, according to revised data released by the country’s central bank last week.

The headline figures looked fine overall, with growth accelerating in the October-December period compared to the preceding quarter, defying fears that Asia’s fourth-largest economy may lose momentum under pressure from policy interest rates hovering at a 15-year high and inflation standing above the target for an extended period.

Details of the Bank of Korea’s data, however, revealed both worrying and encouraging aspects of the economy. While exports recovered from a monthslong slump, domestic demand started to lose momentum and the polarization between the two major elements of economic growth is now expected to increase in the coming months.

On a positive note, net exports lifted the economy by 3.1 percent in the quarter on an annual basis, more than offsetting a 0.8 percent fall incurred by the slump in domestic demand, resulting in economic growth of 2.2 percent, according to the data. High interest rates and elevated inflation apparently dampened domestic demand.

Reduced government spending likely resulted from poor tax revenue, but the slowing momentum in private-sector consumption and investment poses a more serious threat to the economy. Both the central bank and the government have tightened policy at one of the fastest paces ever and maintained the stance for a long time to contain red-hot inflation.

Private-sector consumption and investment dragged economic growth down by 0.2 percentage points in the fourth quarter on-year, according to calculations based on the Bank of Korea’s data. Excluding the COVID-19 pandemic crisis period, it was the worst performance of the private sector in 4 1/2 years.

Both the finance minister and central bank chief maintain that it is premature to talk about changing the economic policy stance, pointing to still uncertain prospects for inflation. However, timing is sometimes more critical than the details in economic policy and there are growing signs that it may not be as premature as they think.

Recovering exports may help the trade-reliant economy achieve a slight pick-up in annual growth this year after posting 1.4 percent, the worst performance in the country’s modern history except for crisis years. Still, some economists predict that gross domestic product will fall short of growing more than 2 percent this year.

This means the economy is performing worse than the potential growth rate for two consecutive years, while inflation has firmly peaked. Moreover, private-sector activity is cooling at a time when the government has limited scope to increase fiscal spending due to the aging population, plunging childbirths and increasing social welfare demand.

South Korea has long acknowledged that the economy is too heavily dependent on exports, making it vulnerable to external factors, and has declared its intention to deepen the domestic market. However, the share of private consumption out of the GDP has shrunk to 47.3 percent in the 2020s, down from 49.4 percent in the 2010s and 53.4 percent in the 2000s.

The construction sector, crucial for employment, has been in a severe slump for an extended period. Construction spending managed to rebound in 2023, rising by 1.3 percent, but it was far from encouraging, following a steep contraction in investment during four out of the past five years, according to central bank data.

Annual construction investment, as measured by annual GDP statistics in real terms, was 8 percent smaller in 2023 than in 2017. The government keeps asserting that housing prices have room to fall further after surging during the final years of the Moon Jae-in administration, but it needs to present its policy goals more clearly and help the market avoid a meltdown.

The construction sector has already been severely affected by lingering concerns about the risks associated with project-financing loans, as well as expectations for further drops in housing prices. Furthermore, the lack of visibility and certainty about the future could potentially escalate even a few small, sporadic cases into a full-blown crisis.

The Bank of Korea Act states that the central bank should contribute to the sound development of the national economy by seeking price stabilization through the establishment and execution of efficient monetary and credit policies, while also considering financial stability in performing its monetary and credit policies.

These clauses are widely interpreted as giving the central bank two mandates: price stabilization and financial stability. However, it is essential to pay more attention to the fact that the "sound development of the national economy" is the ultimate goal for policymakers, and preventing the economy from cooling too much is the overarching task for them.

The Bank of Korea has stated that policy authorities in individual countries would be able to manage policy while focusing more on their domestic economic situation this year, as high inflation is no longer an immediate and overwhelming threat. There are growing signals that South Korea can't afford to wait for a long time while its economy keeps losing momentum.

Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. -- Ed.