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South Korean Growth Rate Revised Downward, Following First-quarter Growth

Thursday, September 1st, 2011
growth rate

South Korea continues in its position as fourth-largest economy in Asia by a 1.3 percent Gross Domestic Product. However, although early estimates in April showed 1.4 percent, the Bank of Korea affirmed in the first week of June that the first quarter GDP stood at 1.3 percent.

In fact, it was noted that South Korea's economy grew at this pace during January to March largely to spurt of growth in the manufacturing sector. Yet there were significant figures pointing to a slowdown in domestic demand.

Bank of Korea Estimates

The Bank of Korea stated that the slower pace of growth was largely due to weaker domestic demand combined with very slow facility investment, although exports were robust.

"Despite weakness in capital and construction investments, robust exports led the overall growth in the first quarter," said bank officials. Although goods going out of the country remained at a steady pace, especially in the semiconductor and automobile industries, lesser spending by consumers and investment in facilities affected overall economic performance rates.

Construction investment fell off as the government was concentrating more on social infrastructure, while tech sector investment delays led to slower spending there.

Jung Young-taek, director of the BOK (Accounts Division) says that, "If investment in social infrastructure revives, the domestic demand is likely to pick up."

Key Rates to Stagnate

It is expected that the central bank will freeze the key rate to 3 percent for this month too, as there appears to be greater uncertainty brewing. Some of the leading economic experts, such as Park Sang-hyun at HI Investment & Securities Co., believe that "With poor industrial output in April and slow recovery pace of domestic demand, it is likely that the second-quarter economic growth may cool to below 1 percent."

In fact, inflation risks are peaking as consumer prices rose beyond the Bank of Korea's guidelines of 2 to 4 percent for the fifth month in a row in May. In comparison to the previous year, inflation slowed to 4.1 percent in May from 4.2 percent the previous month. However, key prices excluding the expansive oil and food prices were higher, at 3.4 percent from the previous year.

However, the most important contributor to South Korea's GDP, its exports, grew by 4.6 percent by quarter in the first quarter, exceeding estimations of 3.3 percent growth.

Gross National Income Declines by 0.1 Percent

The GNI reflects the actual purchasing power of a nation, and the present GNI for the first quarter is at 0.1 percent lower than the previous quarter. This was the first recognized fall in over two years.

Recommendations by Korea Development Institute or KDI

KDI predicts that "the 2011 inflation will rise to 4.1 percent instead of the former 3.2 percent estimate," and suggests that the Bank of Korea should lift its key rate despite the perceived inflation risks.

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