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Korean Economy

Korea’s GDP Growth in the First Quarter of 2021

The Korean Economy continued to gain recovery momentum in the first quarter of 2021. Its gross domestic product (GDP) increased by 1.7% compared to the last quarter of 2020, allowing the economy to get back to pre-pandemic levels. The primary drivers of growth were a strong rebound in fixed investment and robust export performance. Korea’s GDP expanded by 1.9% year on year, beating expectations of most economists.

Equipment investment expanded by 6.1% during January - March, leading the faster-than-expected recovery. Businesses spent more money on production facilities in line with rises in global demand and trade volume. Corporate investment spending increased solidly both in machinery and transportation facilities.

Quarterly Economic Growth
* Figures in ( ) refer to year-on-year growth rates. Balance of payments basis data is used for exports. (Source: Bank of Korea, June 9, 2021)

Korea’s exports also grew robustly in the first three months of 2021 amid growing shipments of automobiles, semiconductors and mobile phones. Strong global demand for its products such as cars and chips helped the export-driven economy perform relatively well throughout the COVID-19 pandemic.

Private consumption recovered to a 1.2% increase after shrinking by 1.3% in the preceding quarter. The rebound was attributable mostly to eased social distancing measures in February 2021. As consumer sentiment improved, there was a pickup in purchases of both durable goods such as cars and electronics and nondurable goods. In the meantime, government spending rose by 1.6% compared to a 0.4% decline three months earlier.

The brisk first-quarter GDP expansion led to 2021 outlook upgrades by the Bank of Korea (BOK) and many other institutes. In May, the central bank raised its economic growth outlook for 2021 to 4% from its previous forecast of 3% in February. This upgraded outlook reflects improving global economic conditions thanks to the quickening pace of vaccination especially in advanced economies as well as expectations that the country’s monetary policy will stay mostly accommodative.

Korea's GDP Growth (2012-2021(E))
(Source: Bank of Korea, May 27, 2021)

The BOK also made an upward adjustment of its inflationary forecast for 2021 to 1.8% from 1.3%. Although inflationary pressure still remains low, the BOK signaled that a rate hike may come later this year depending on the pace of economic recovery. The central bank has frozen its key interest rate at 0.5% since the rate was slashed to that record low level in May 2020.

Korea’s Export Growth Performance and Prospect

Korea’s exports surged by 12.5% to USD 146.5 billion in the first quarter of 2021 compared to a year earlier, recording the largest quarterly volume since the fourth quarter of 2018. The automobile, shipbuilding, petrochemical, and semiconductor industries led the robust growth of exports, with external demand rising strongly on the back of huge fiscal stimulus programs in many economies around the world. Export recovery has continued for three quarters in a row since the third quarter of 2020.

Korea's Exports and Export Price Index (2019-2021)
* Customs-basis trade data (Source: Export-Import Bank of Korea)

Korea saw its exports to major trading partners such as China and the U.S. record double-digit growth in the January to March period of 2021. Exports to China jumped by 25%, which was partly driven by the low base in the first quarter of the previous year when industrial activities had come to an abrupt halt in China due to the COVID-19 pandemic. Korea’s trade with the EU also soared, with exports to the region growing by 24%. It was fueled largely by demand for Korean bio-health products including COVID-19 test kits, and eco-friendly cars amid strengthening environmental regulations in the EU. Exports to the U.S. rose by 19.9% thanks to strong growth in memory chips and car sales as consumer sentiment improved on massive fiscal and monetary stimulus in the world’s biggest economy.

The outlook for Korea’s second-quarter exports looks rosy as the export leading index for the April to June period increased to 125.5 compared to 116.5 in the same period of last year and 121.1 in the first three months of this year. Export gains are expected to be a ten-year high of 35% in the second quarter of 2021. Korean exporters are likely to benefit from the economic recovery momentum in the nation’s major export destinations as well as a hike in export prices driven by rising prices of international oil and DRAM, a type of random-access semiconductor memory. In particular, the prices of semiconductors are expected to remain under upward pressure as production capacity seems to fall short of meeting rising demand.

One Year of COVID-19: How the Pandemic Has Affected the Korean Economy

COVID-19 has caused a significant impact on the Korean economy in many aspects, reducing its real GDP growth by over 3%p. The Korea Institute for Industrial Economics and Trade has traced the major impacts of COVID-19 on consumer spending, jobs, industry, and the overall economy in the year that followed.

COVID-19 Impacts on the Korean Economy
* GDP trend estimates are the average annual growth rates of the previous five years, and the employment trend estimate is the average growth rate of the previous three years. (Source: Korea Institute for Industrial Economics and Trade, May 10, 2021)

Private consumption and employment have borne the brunt of the pandemic. Consumer spending decreased by more than 7%p compared to the level that had been estimated without taking into account pandemic effects, while there was a reduction of 460,000 jobs. This means that the economy was hit by the second biggest shock after the Asian financial crisis in 1998 in terms of private consumption and employment.

Comparison of Impacts from Economic Crises

Sharply reduced consumer spending has been associated with the fact that the service industry has suffered greater demand shocks than the manufacturing industry through the coronavirus crisis. The pandemic had disproportionately huge impacts on the service sectors, such as food and beverages, accommodation, retail, and hospitality, because they traditionally depend on face-to-face communications.

As such, the pandemic-induced economic shocks have turned out quite uneven by industry sector, and this was one of the most striking features of the recent recession. More so than any prior economic recession, the COVID-19 crisis has ravaged certain industries, like travel and transport, while leaving others relatively unscathed or less impacted. Some sectors including online shopping, biotechnology and semiconductor even enjoyed unexpected gains due to changes in lifestyles in the wake of the coronavirus pandemic. For instance, demand for computers has soared in step with the rising trend of remote work and distance learning, leading to a jump in sales of desktops, laptops and computer chips.

The economy is now on track to recovery after bottoming out in the second quarter of 2020, but some sectors of the economy still remain tightly in Covid-19’s grip. In other words, while enthusiasm is high about an economic rebound, there is some divergence in the pace of recovery by sector and industry. The labor market, private consumption, and the service industry are far from getting back to normal.

As opposed to those sectors, the manufacturing industry showed solid gains, with production output rebounding to the pre-pandemic level. Export recovery is also accelerating quickly, providing strong momentum to overall economic growth. In May 2021, Korea’s exports surged by 45.6% on-year, recording the sharpest expansion in 32 years, as demand for Korean products including chips is rising.

Korea’s Default Risk at Lowest Since 2007

Korea's default risk dropped to the lowest level in mid-June 2021 since April 2007 in the midst of indications that the economy was recovering fast from the pandemic. The country's five-year sovereign credit default swap (CDS) premium declined to a low of 18bp on June 14, 2021. A CDS is a type of insurance against default risk by a country or a company, and the CDS premium is a major indicator of credit risk on sovereign or corporate debt. The lower the CDS premium is, the lower the credit risk of the bond issuer is.

Korea’s Five-Year CDS Premium
(Source: www.worldgovernmentbonds.com)
CDS Premium by Economy (as of May 5, 2021)
* Other countries with the CDS premium of 10 bp include Norway, the U.S., Finland, the Netherlands, Sweden, and Austria. (Source: Ministry of Economy and Finance)

Korea saw its CDS premium reach as high as 57bp on March 23, 2020 at the onset of the coronavirus pandemic. Since then, it has stabilized to the pre-pandemic level, with the economy showing signs of robust recovery. The recent decline in the CDS premium is noteworthy as CDS premiums for many other economies have been rising since April 2021. As of early May 2021, Korea’s CDS premium was the 17th lowest level globally and the lowest among emerging economies.

In spite of some shocks from COVID-19, the Korean economy has remained relatively resilient throughout the pandemic, demonstrating its strong fundamentals. Even during the peak of the pandemic when global demand and trade volume plunged, the country continued to post current account surplus for ten months in a row between May 2020 and February 2021. Also, the foreign exchange reserves that Korea held amounted to USD 452.3 billion at the end of April 2021, representing the 9th largest in the world.

In addition, the country has maintained strong sovereign credit ratings from major international credit rating agencies. Although 113 countries around the world have experienced downgrades of their ratings or rating outlooks since last year, strong credit ratings on Korea have been affirmed recently by S&P and Moody’s. In late April, S&P Global Ratings affirmed South Korea’s credit rating at AA with a stable outlook, followed by Moody’s affirmation of Aa2 with a stable outlook. The Aa2, or the third-highest on the Moody’s rating table, has been kept in place for the country since 2015.