External risks feared to derail Korea's economic recovery

GDP growth slows to 0.7% in Q1 on sluggish spending and investments

By Yi Whan-woo

The Korean economy is feared to lose growth momentum further in the coming quarters as multiple headwinds, such as the Ukraine-Russia war and soaring energy prices, are set to weigh on the nation's exports that underpinned economic performance in the first quarter.

The concerns come as the Bank of Korea (BOK) reported Tuesday that the nation's gross domestic product (GDP) grew 0.7 percent in the first quarter compared to the previous three months, slowing from the 1.2 percent expansion seen in the fourth quarter of 2021, due to sluggish private spending and corporate investments hit by the fallout of the COVID-19 pandemic.

Experts expect Korea's robust outbound shipments will be unable to support the country's growth in the coming quarters, as global economic risks can pose a greater threat to its exports and trade balance.

They said Russia's invasion of Ukraine and China's largest-ever COVID-19 lockdown in parts of the country may aggravate hikes in energy and commodity prices as well as exacerbate disruptions of supply chains, having a more adverse impact on imports that are attributed to the recent trade deficits.

The trade deficits accordingly will negatively affect the pace of growth, making it difficult for the country to achieve its annual growth target of 3.1 percent projected by the Ministry of Economy and Finance and 3 percent by the Bank of Korea (BOK).

"I'd say the Ukraine crisis and the influence of China's lockdown on its economy are not sufficiently reflected in Korea's GDP growth in the first quarter," said Joo Won, deputy director of the Hyundai Research Institute. "It will be from the second quarter that risks associated with the two events will be in full swing and dampen our economic growth further."

Hwang Sang-pil, head of the economic statistics bureau at the Bank of Korea (BOK), gives a press briefing on Korea's Q1 GDP growth at BOK headquarters in central Seoul, Tuesday. Yonhap

During that January-March period, exports grew 4.1 percent from a quarter ago, while private spending and corporate investment contracted 0.5 percent and 4 percent, respectively, amid mounting inflationary pressure. Imports increased 0.7 percent due mainly to a spike in global oil prices

"Against this backdrop, the trade balance is likely to stay in the red in the coming months, and even if the country logs a trade surplus, the surplus volume is expected to be minimal," Joo said.

He pointed out that Korea's trade balance swung to a deficit of $140 million in March, after logging a $831 million surplus in February.

The country also suffered a trade deficit in December 2021 ($4.5 billion) and January of this year ($4.89 billion), marking the first trade deficit for two straight months in nearly 14 years.

Seo Jeong-hun, a senior researcher at Hana bank, echoed a skeptical view on Korea's trade balance and annual growth.

"The country faces the burdens of production costs, consumer spending due to soaring energy prices and the U.S. Federal Reserve's faster-than-expected tapering that complicate problems associated with inflation," he said.

Concerning the 0.7 percent quarterly growth, Seo said, "It suggests the economy may not pick up pace as it moves on to the latter quarters, and that both the finance ministry and the central bank may possibly revise their respective economic outlooks."

He noted Korea's 2022 economic growth outlook was already slashed from 3 percent to 2.5 percent by the International Monetary Fund and from 3 percent to 2.7 percent by Moody's in the wake of the Ukraine crisis in late February.

During a press briefing on the first-quarter GDP growth performance, Hwang Sang-pil, head of the BOK's economic statistics bureau, expressed concerns over the growing risks from the war in Ukraine and lockdown in China.

Still, he remains upbeat over economic prospects, noting that Korea's key export items, such as microchips and cars, are on "a recovery course in terms of demand."

He forecast between 0.6 percent to 0.7 percent GDP growth in each of the next three quarters.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki assessed the GDP growth in the first quarter exceeded the government's expectation of 0.6 percent.

On his Facebook, Hong said such higher-than-expected performance was meaningful considering it marks the "final grade on the economy before the end of the Moon Jae-in administration."

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