Korea's GDP Growth in the First Quarter of 2024

Since the downturn in the first half of 2023, the Korean economy has been on a path to a moderate recovery. In line with this trajectory, Korea’s real gross domestic product (GDP) experienced a surprising growth of 1.3% quarter on quarter in the first three months of 2024 (3.4% year on year).

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

Private consumption grew by 0.8%, driven by higher consumption of both goods (including apparel) and services (including food and accommodation). Government spending rose by 0.7% due to increased expenditure on goods. Construction investment grew by 2.7%, supported by demand in both building construction and civil works. However, equipment investment declined by 0.8%, impacted by a contraction in transport equipment investment. Exports rose by 0.9%, buoyed by robust sales of IT devices (including mobile phones), while imports decreased by 0.7% due to a downturn in the volume of electric equipment imports.

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

Despite the ongoing conflicts in Russia-Ukraine and Israel-Gaza, the Korean economy maintained relatively solid footing in the first quarter of 2024. This resilience was bolstered by improved exports and domestic demand growth, largely due to a rebound in the semiconductor sector. Subsequently, the growth forecast for the Korean economy in 2024 has been adjusted upwards from 2.1% (with a range of 1.9 - 2.3%) to 2.5%. However, the sustainability of this recovery remains uncertain, given the residual risks of commodity price hikes, rising geopolitical tensions, and increased volatility in the foreign exchange market. In the first quarter of 2024, the real gross domestic income (GDI) increased by 2.5%, outpacing GDP growth of 1.3%.

On May 23, 2024, the Bank of Korea's Monetary Policy Board once again decided to maintain the base rate at 3.50%. While the global economy continues to grow moderately, economic conditions show striking differences among economies: the U.S. labor market remains robust with ongoing consumption growth, whereas the euro area is expected to experience sluggish growth into later this year. Despite the ongoing real estate slump, the Chinese economy is expected to achieve mid- 4% growth, supported by active economic stimulus measures and improved exports. Global inflation is trending downward, but the rate of decline varies by country. Additionally, the international financial market has rowed back on expectations for rate cuts this year, as indicators point towards stronger growth in the U.S. economy.

(Source: Bank of Korea, May 23, 2024)

While consumption recovery remains moderate, the Korean economy is expected to improve overall economic performance. The recovery is sustained by stronger-than-expected export growth, benefiting from the robust U.S. growth and a rebound in the semiconductor sector. However, a divergence between domestic demand and exports is likely to persist. The growth rate for this year is projected to meet or exceed the initial forecast of 2.1% made in February 2024.

Core inflation fell to 2.4% in March, and other primary inflation indicators are also showing a slowing trend. However, consumer price inflation remained steady at 3.1% compared to the previous month, influenced by increases in agricultural product prices and global oil prices. Short-term inflation expectations among the general public have risen to 3.2%. Looking ahead, core inflation is expected to slow to around 2% by the end of the year. Consumer price inflation will be determined by developments in geopolitical risks, movements of global oil prices, and trends in agricultural product prices amid heightened uncertainties.

Although core inflation is likely to maintain its slowing trend, there is still a high degree of uncertainty associated with the consumer inflation outlook. Therefore, the Bank of Korea will maintain a restrictive monetary policy stance considering external and internal policy conditions, while keeping a close watch on price trends.

Korea's sovereign credit ratings stand at AA from S&P (since April 26, 2022), Aa2 from Moody's (since May 19, 2023), and AA- from Fitch (since October 17, 2023). Fitch has reaffirmed Korea's sovereign rating and outlook as AA- (Stable). Key rating drivers were robust external finances, resilient macroeconomic performance, and a dynamic export sector that counterbalances geopolitical risks, lagging governance indicators, and structural challenges linked to the aging population. In its rating action commentary, Fitch forecasted a gradual recovery of the Korean economy and a narrowing of the consolidated fiscal deficit, supported by the Korean government's effort to restrain spending. Subsequently, Fitch also evaluated Korea's external soundness to be in good shape.