Korea's GDP Growth in the Fourth Quarter of 2023

After a sluggish first half, the Korean economy rebounded in the second half of 2023, fueled by a recovery in the IT industry. In the fourth quarter of the year, Korea's real gross domestic product (GDP) grew by 0.6% quarter-on-quarter, demonstrating a year-on-year growth rate of 2.2%. For the whole year of 2023, economic growth slowed to 1.4% compared to the year before.

(Source: Bank of Korea, Jan 25, 2024)

While goods consumption remained subdued, overall private consumption grew by 0.2% in the fourth quarter compared to three months earlier, driven by better-than-expected employment, higher household real income, and an increased number of people traveling abroad. Government spending rose by 0.4% due to increased spending on the acquisition of goods and funding for the national health insurance program. Construction investment increased by 2.1% in the third quarter but declined by 4.2% in the fourth quarter due to downturns in both building constructions and civil works, impacted by the reduced number of starts. Equipment investment rose by 3.0% as a result of increased investments in the semiconductor and aviation industries. Export growth reached 2.6%, buoyed by sales of chips and cars. Imports rose by 1.0% due to increased demand for petroleum products.

*Figures in (  ) refer to year-on-year growth rates. (Source: Bank of Korea, Jan 25, 2024)

With a high susceptibility to global market swings, the Korean economy is faced with a greater level of uncertainty in the short-term stemming from the protracted war in Ukraine and the Gaza conflict. Meanwhile, the supply chain disruption continues to rumble on, albeit somewhat alleviated compared to the onset of the war. Nevertheless, a fast recovery is spurred in the global manufacturing market, particularly in the semiconductor sector. The continued demand for Korea's capital goods is also bolstered by shifts in policy direction among key economies towards more environmentally sustainable growth and the advancement of artificial intelligence.

The Korean economy is projected to grow by 2.1% (with a range of 1.9-2.3%) in 2024. In 2025, growth is anticipated to improve to 2.3% owning to the easing of monetary policy, which will gradually improve economic conditions both at home and abroad. The inflation trajectory is set to flatten to 2.6% in 2024, down from 3.6% (core inflation of 3.4%) in 2023. The current account surplus outlook is projected to be USD 49 billion in 2024, and the pace of employment growth is expected to gradually slow down, particularly in the service sectors.

Based on these forecasts, the Korean Monetary Policy Board froze the key interest rate at the current 3.5% level on January 11, 2024. The continued high interest policy has stabilized global inflation, and consumer prices have significantly slowed compared to the peak in many economies. Monetary tightening will continue to have significant spillover effects on the real economy, which will, in turn, dampen the global growth outlook. This year, the Korean economy is expected to see a turnaround from last year's tepid trade growth, having a positive effect on overall export performance.

(Source: Bank of Korea, Jan 11, 2024)

A gradual upturn is predicted for Korea's domestic economy, led by brisk growth in semiconductor and automobile exports. On the other hand, weak domestic demand poses a challenge to export-led recovery as evidenced by decreases in private consumption and investment. Although the unemployment rate fell to a historic low of 2.3% in the third quarter of 2023, signs of strain are growing in vulnerable sectors amid a high interest-rate environment.

The recent inflation trend shows that the high-interest policy is effective in beating down inflation. As such, monetary tightening will continue for the time being until it becomes clear that the inflationary bias is controlled at the target level (2.0%).

The high interest-rate environment helps laying the foundation for stable growth by curbing private debt and allowing more room for future expenditure and investment. Economic downturns can be painful, but they provide a necessary reset for the market to restructure industries that are no longer competitive and enable a more productive allocation of resources. Therefore, the Bank of Korea is poised to maintain its stance and monitor movements in the domestic and international financial markets as well as changes in economic conditions. If need be, the central bank will endeavor to attenuate side effects by utilizing liquidity adjustment as the main microeconomic policy tool.