The South Korean economy last quarter shrank for the first time since the beginning of the COVID-19 pandemic, an outcome that bolsters predictions that the central bank is likely to cease interest rate hikes for the short term.
The nation’s GDP contracted 0.4 percent from the previous three months as exports fell and consumer spending edged down, the Bank of Korea said yesterday.
However, the economy expanded by 1.4 percent from a year earlier.
Photo: EPA-EFE
Bank of Korea Governor Rhee Chang-yong had flagged the possibility of a contraction earlier this month when he delivered a quarter percentage-point interest rate increase.
Recent weakness in economic activity prompted markets to interpret the hike as the final move in the current tightening cycle.
The economy last year expanded 2.6 percent from a year earlier, in line with an earlier central bank projection.
The fourth-quarter setback for the economy is an indication of the difficulty of taming inflation with higher borrowing costs while also trying to secure a soft landing amid a global slowdown.
“Rates, oil prices and inflation have all contributed to hurt consumption,” KB Kookmin Bank chief economist Chang Jae-chul said. “It’s a very difficult situation.”
Regardless, the temptation to resort to an extra budget to shore up the economy should be treated with much caution, Chang said.
Officials and economists largely expect the economy to rebound without the need for a round of extra spending from the government. The strength of China’s economic recovery is likely to be a key factor for exports, while developments in the property market number among the areas of concern at home.
South Korean Minister of Finance Choo Kyung-ho acknowledged yesterday that the economy faces a “very difficult period” in the first half of the year.
South Korea serves as an early indicator of the state of the global economy given that it depends heavily on international trade. The nation’s performance is closely connected to those of major economies including China, the US and Japan.
South Korea is also vulnerable to fluctuations in global commodity prices, as it relies heavily on imports of oil and food.
As rates climbed worldwide, companies reined in investment, reducing demand for the nations products, such as semiconductors, steel and displays.
An economic slowdown in China particularly hurt South Korean exports last year. The government in Seoul is also concerned about the potential effects of growing US curbs on China over chip exports, given South Korea’s large chipmaking facilities there.
“Exports and their impact on Korea’s growth are top of mind for policymakers,” Pantheon Macroeconomics analyst Duncan Wrigley said after early trade data showed an ongoing decline in overseas shipments last week.
South Korean exports “will likely remain on a downward trend given the poor economic prospects in its major markets,” he said.
While trade is on a downturn, consumption is weakening in South Korea.
The nation’s economy is expected to grow slightly less than 1.7 percent, the central bank said, adding that inflation is estimated to reach 3.6 percent.
As the outlook darkens, the Bank of Korea is winding down its 18-month tightening cycle. The consensus among surveyed economists is that rate hikes are unlikely for the rest of this year.
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