South Korean economy: Strong first quarter – what next?

In South Korea, gross domestic product grew by a substantial 1.6 percent in the first quarter of 2021. In the fourth quarter of last year, growth had been slightly lower at 1.2 percent. Despite the pandemic and ongoing measures to contain it, the South Korean economy is doing very well so far. While private consumption was still declining in the fourth quarter, it grew solidly by 1.1 percent in the opening quarter. Business investment in equipment has also risen significantly (+6.6 percent), while exports, after very strong rates in the second half of 2020, have increased somewhat less markedly than recently (+1.9 percent). As imports have expanded at a slightly faster rate, the trade surplus has narrowed slightly.

The Covid-19 pandemic and the measures taken to contain it also led to a sharp decline in economic output in South Korea in 2020, although this was much smaller than in other developed economies. Various containment measures and uncertainties about the further course of the pandemic remain. The increasing availability of vaccines – South Korea began vaccinating its population in 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 and were tightened again somewhat in April in light of rising case numbers.

The South Korean economy will continue to grow at solid rates for the rest of 2021. This is also indicated by the indices collected by the central bank, which measure business and consumer sentiment. Economic growth will again be driven more by domestic demand. However, exports are also likely to continue to rise strongly in the wake of the global economic recovery. In addition, 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.

Despite the economic slump, the official unemployment rate increased only slightly during 2020; the government’s short-time working program prevented a sharper rise in unemployment. As the economy gradually recovers, the unemployment rate will gradually decline again. All in all, the South Korean economy will probably expand by 3.6 percent in the current year. In 2022, the growth rate is likely to be 2.5.

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