South Korea: Comparatively favorable development

In South Korea, gross domestic product increased by 1.1 percent in the fourth quarter of last year. In the third quarter, growth had been even stronger at 2.1 percent following the lockdown-related slump of 4.4 percent in the first half of the year. Overall, the South Korean economy contracted by 1.0 percent last year – a low rate when compared to other advanced economies. While private consumption declined in the fourth quarter, business investment and exports grew strongly, partly due to high global demand for cars and semiconductors. With imports expanding at a low rate, the trade surplus widened significantly.

The Covid-19 pandemic and the measures taken to contain it also led to a sharp decline in economic output in South Korea, although this was much smaller than in other advanced economies. Various containment measures and uncertainties about the further course of the pandemic remain and are dampening economic momentum – especially until the end of winter. The increasing availability of vaccines – South Korea begins vaccinating its population in the end of February – and the onset of the summer half-year should gradually ease the pandemic situation. Restrictions, particularly on personal services, are likely to remain in place for some time.

In the first quarter of the current year, South Korean economic output will probably increase only slightly. This is also indicated by the indices compiled by the central bank, which measure business and consumer sentiment. From the second quarter onward, GDP is expected to grow more strongly again; exports in particular will probably continue to increase strongly in the wake of the global economic recovery and growing foreign demand. Above all, however, expansionary monetary and fiscal policies are supporting the South Korean economy. The central bank is likely to continue its expansionary policy of low interest rates and securities purchases, thus also keeping interest rates low for private companies. Inflation is likely to remain low in the forecast period; the inflation target of two percent will probably not be reached for the time being. Fiscal policy is also expansionary, supporting the economy.

Against the backdrop of the economic slump, the official unemployment rate increased from 3.4 in the end of 2019 to 5.4 in January 2021; the government’s short-time work program has prevented a sharper rise in unemployment. As the economy gradually recovers, the unemployment rate will start to decline. Business investment is expected to increase at solid rates. All in all, I expect the South Korean economy to grow by 3.2 percent in the current year. For 2022, I forecast a growth rate of 2.8.

Processing…
Success! You're on the list.

Some of my blog posts and economic forecasts are first reserved to my paying subscribers. After two weeks, all articles are publicly available. If you would like to get instantaneous access, you can subscribe for 5 US dollars per month (or the equivalent amount in your currency). You can unsubscribe at any time:  

Email: info@eagle-economist.com

WordPress Cookie Plugin by Real Cookie Banner
%d