Korea avoids recession on strong consumption; outlook still tough

South Korea averted a recession as Asia’s fourth-largest economy rebounded more than expected in the first quarter on strong private consumption, while a sharp drop in capital expenditures added to the gloomy outlook given sluggish exports.

The gross domestic product expanded by a seasonally adjusted 0.3% in the first quarter from the previous three months, central bank advance estimates showed on Tuesday. The latest growth topped a 0.1% prediction in a Bloomberg survey and a 0.2% forecast in a Reuters poll.

Private consumption grew 0.5% led by higher spending on leisure and tourism, although facility investments dropped 4%, according to the Bank of Korea.

The economy is expected to remain in the doldrums, analysts said, seeing the first quarter's economic growth as just as a technical rebound after a 0.4% contraction in the last quarter of 2022, the first economic contraction in two and half years.

“Despite the rebound, it is hard to expect a trend recovery,” said Ha Keonhyeong, an economist at Shinhan Securities Co., expecting the economy to grow by a mere 0.8% this year, half the BOK’s latest forecast of 1.6%. The central bank is expected to cut the forecast as the monetary authority already flagged the risk of missing the prediction.

Ha anticipated a recovery in domestic demand driven by higher private consumption may lose steam again. Overseas demand is likely to remain sluggish as China’s reopening has yet to boost goods consumption and investments in the mainland, putting pressure on South Korea’s exports, he said. Developed economies are also expected to slow in the second half, he added.

BOK LIKELY TO KEEP INTEREST RATES

The grim economic outlook reinforced views that the BOK may leave interest rates unchanged for the rest of the year. The central bank raised its policy interest rate by 3 percentage points to 3.50% through 10 hikes since August 2021 to curb rampant inflation.

Reflecting the expectations, the highly liquid three-year government bond yield held steady at 3.23% even after the stronger-than-expected GDP data in the morning local bond market, according to the Korea Financial Investment Association.

Some economists still saw a potential rate cut this year, given the weak domestic property sector and economic conflict between China and the US, although BOK Governor Rhee Chang-yong defied such expectations, saying its tightening is not over.

“As we see growing downside risks for the economy on the back of weak local housing markets and intensifying tensions between the US and China, a potential BOK cut is still possible by the end of this year,” said Kang Min Joo, a senior economist at ING in a note.

Write to Jin-gyu Kang at josep@hankyung.com
 
Jongwoo Cheon edited this article.