© YONHAP News

The Korean economy grew above 1 percent in the second quarter. According to data from the Bank of Korea on July 25th, the country’s gross domestic product or GDP expanded 1.1 percent in the April to June period from the previous quarter. Here is economic commentator Chung Chul-jin to analyze the rebound in GDP growth. 

The Korean economy expanded 1.1 percent in the second quarter, compared to the previous quarter. On an annual basis, the local economy grew 2.1 percent. Many had paid great attention to the GDP growth in the second quarter because the economy shrank unexpectedly by 0.4 percent in the first three months of the year, stoking concerns that the nation might be mired in a severe recession. Fortunately, the economy managed to bounce back in the second quarter. This return to growth is certainly a relief. 

The recent quarterly growth is the highest since the third quarter of 2017 and a significant rebound from the previous quarter when the economy marked its worst performance in a decade. However, the latest 1.1 percent figure is not as positive as it seems.

Construction and facility investment increased from three months earlier in the April to June period. But we have to note that the previous quarter’s negative 0.4 percent growth was so low that even a small rise from this low figure could be translated as a big change in the so-called base effect. 

It seems consumption and exports picked up pace in the second quarter. Consumption, in particular, showed signs of recovery on the whole, led by the government’s active spending. But investment still remained relatively weak. 

With the base effect reflected, the 1.1 percent quarterly growth could be viewed as an upbeat result. However, the contribution of private consumption to growth came to minus 0.2 percentage points, while government spending contributed 1.3 percentage points to growth. In other words, the GDP growth in the second quarter can largely be attributed to the government’s fiscal stimulus. 

Due to the base effect and heavy government spending, many analysts say that it is difficult to interpret the rebound in GDP growth as a sign of economic recovery. It will be a challenge to meet the Bank of Korea’s projected growth target of 2.2 percent for this year.

Other than the government’s fiscal policy, we didn’t see any positive factors that made the economy grow in the second half of the year. Until early this year, many had expected that the semiconductor business would bottom out in the second quarter and recover in the remaining quarters to give a boost to exports, the main growth engine of Korea. 

Unfortunately, Korea is now faced with Japan’s unexpected economic retaliation, while the U.S.-China trade conflict shows no clear signs of stopping. It’s uncertain how long and how extensively Japan will keep its export restrictions against Korea in place. But if Japan continues with its strong retaliatory economic measures until the end of the year, it will be difficult for the Korean economy to post meaningful growth in the second half.

On July 18th, the Bank of Korea cut its key interest rate and also lowered its 2019 growth outlook from 2.5 to 2.2 percent. To meet the new growth forecast, the third and fourth quarters must witness a growth rate of 0.8 to 0.9 percent. 

The problem is that there are many uncertainties outside the country. In the aftermath of the U.S.-China trade war, Korea’s exports have been on the decline since December. To make matters worse, Tokyo has pushed ahead with export restrictions targeting Seoul, further dimming the outlook for the Korean economy. 

Bank of Korea Governor Lee Ju-yeol has warned that this year’s growth rate might be downgraded even further if the trade conflict with Japan worsens. To prepare against a possible economic downturn, the Korean government is pushing to promptly execute the budget.

No one can predict with certainty that an extra budget will spur growth. But the execution of an extra budget is one of the very few options the government has to stimulate the economy. Typically, governments boost the stock market or the real estate market with an economic stimulus. Rising prices in stocks or real estate may prompt people to spend money, and the increasing consumption will keep the economy afloat. But the current Korean government has already said that it will not use those measures. So, the options available now are the central bank’s monetary policy of lowering the benchmark interest rate and the government’s active fiscal policy.

The four components of GDP are consumption, investment, government spending and net exports. The government’s fiscal contribution to last year’s growth of 2.7 percent came to 0.9 percentage points. But Seoul has already spent 65 percent of its annual budget of 470 trillion won in the first half of this year. So, it’s hard to expect any tangible effect from the government’s fiscal stimulus in the second half of the year, even with an extra budget. The key factor for the rest of the year will be the recovery of the private sector.

The government has depended on expanded fiscal expenditures for economic stimulus. But private-sector investment is essential in boosting the economy. In this respect, the government must consider easing various regulations, as private companies have requested, and find ways to increase corporate investment. 

For now, it is important to properly deal with Japan’s export curbs on South Korea and the U.S.-China trade row. From a long-term perspective, Korea should secure new growth engines. While experiencing difficulties triggered by Japan’s move, Korea realized that it has relied on semiconductors too much and made little effort to develop other promising industries. There is a saying that the earliest time is when you think it is too late. Even now, Korea needs to explore future growth engines. 

Japan’s restrictions on exports of key materials used to make semiconductors, South Korea’s main export item, are likely to be drawn out. It is forecast that Korea’s exports and investments may weaken further unless there is a dramatic turnaround in the situation. It is time to carefully examine how to invigorate the private sector.