South Korea’s economy grew more than expected at the beginning of the year, providing the central bank with breathing room while also highlighting ongoing risks to growth.
(Bloomberg) — South Korea’s economy grew more than expected at the beginning of the year, providing the central bank with breathing room while also highlighting ongoing risks to growth.
Gross domestic product advanced 0.3% in the first quarter, rebounding from the final three months of 2022, when it contracted 0.4%, Bank of Korea data showed Tuesday. The latest data compares with estimates for a 0.2% expansion in a Bloomberg survey of economists.
The data will be a welcome sign for Bank of Korea officials who are trying to balance taming inflation with the country’s economic growth. The figures provide policymakers with more room for patience in setting policy.
The central bank kept its key rate unchanged this month for a second straight meeting, noting that the country’s annual economic growth may be slightly below its earlier 1.6% forecast. At the same time, Governor Rhee Chang-yong ruled out the possibility of an interest rate cut before inflation showed clearer signs of easing.
Bank of Korea officials at the press conference following the report release said they expect some improvement in growth by the end of the year, though the exact timing is uncertain. They highlighted that they see an eventual recovery in the chips sector and will be watching equipment spending and construction closely for signs of improvement.
“The results were slightly stronger than expectations, but there is still a question mark over whether it will be sustained,” said Park Sang-hyun, an economist at HI Investment & Securities Co. “Figures largely suggest the economy is still trying to find a bottom.” There’s also potential for the construction sector to sour further amid falling home prices, he said.
Domestic consumption improved in the January-March period, supporting growth. Meanwhile, equipment spending weighed on the quarterly data, contracting the most in at least two years. On an industry basis, manufacturing and health care rebounded from the fourth quarter. Sectors led by agriculture and transportation and storage declined in the period.
Korea’s economy has been buffeted by a sixth-month drop in exports marked by a record trade deficit in January amid falling semiconductor prices. A shaky local housing and project financing market and tensions between the US and China — Korea’s two largest trading parters — adds to risks in the economy going forward.
“Weak equipment spending suggest the IT sector has yet to recover,” said Woo Hye-young, fixed-analyst analyst at Ebest Investment & Securities Co. in Seoul. “The key things to watch going forward will include whether domestic consumption will continue recovering, and whether investments in equipment will turn to a plus soon.”
Meanwhile, inflation continues to stay elevated above the central bank’s 2% target, with prices up 4.2% in March. Rhee said earlier this month that the central bank’s war on inflation isn’t over despite early signs of cooling prices.
GDP data point to an economy showing signs of resilience in the face of officials’ rate hiking campaign and weaker overseas demand. Five board members said this month they were open to a higher terminal rate, implying one more rate hike this year. Meanwhile, analysts expect the central bank to keep rates unchanged through at least the end of the second quarter, a Bloomberg survey shows.
(Updates with economist comment)
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