S.Korea’s economy slows in Q2, but on growth course

South Korea’s economy unexpectedly slowed in the second quarter on softer private consumption and business investments, reinforcing expectations of a rate cut, but the central bank brushed off any excessive concern about the latest retreat and maintained high expectations of 2.5% growth this year.

Gross domestic product in Asia’s fourth-largest economy grew 2.3% year over year in the April-June period, slower than the previous quarter’s revised 3.3% growth, the Bank of Korea’s preliminary data showed on Thursday.

Against the prior quarter, the economy contracted 0.2%, a reversal from the first quarter’s 1.3% expansion. This marked the first quarterly backstep since the fourth quarter of 2022 with a 0.4% drop and snapped the five-quarter growth streak.

The latest reading suggests that the Korean economy expanded 2.8% on-year during the first six months of this year, a tad below the central bank’s earlier forecast of a 2.9% growth.

“If the country’s economy grows 2.2% in the second half as expected, the country is expected to achieve a growth of 2.5% this year,” meeting the central bank’s earlier forecast made in May, said Shin Seung-chul, director general of the Economic Statistics Department at the Bank of Korea.  

The Korean economy expanded at 1.4% in 2023.

IS A BOK RATE CUT IMMINENT?

A slump in private spending and business investments was largely blamed for the GDP retreat in the second quarter.

Private consumption and construction investment, which were behind the surprise growth in the Korean economy in the first quarter, fell 0.2% and 1.1% from a quarter earlier, respectively, in the cited period. Facility investment also decreased by 2.1% over the same period.

Exports maintained steady growth in the second quarter with a 0.9% gain but imports increased faster at 1.2% due to a rise in the country's oil and petroleum purchases.

Both consumer and business spending waned in a high interest rate environment under the lengthy tight monetary policy, said market analysts, forecasting the BOK would consider pivoting toward policy easing later this year to stimulate the economy.

The central bank kept its benchmark policy rate unchanged at 3.50% for the longest streak of a 12th straight time this month. 

MORE OPTIMISTIC THAN CONCERNED

But the central bank shrugged off excessive concerns about the country’s economy.

Compared to the last contraction in the economy in late 2022 reeling from the COVID-19 pandemic, the latest 0.2% drop is a correction rather than a sign of recession, according to the bank.

“The retreat is largely due to a high base effect following a big leap in the first quarter during the growth phase,” said Shin.

“Inflation and high interest rates are expected to moderate, helping domestic demand recover incrementally.”  

He also projected facility investment will gain steam in the semiconductor industry in the third quarter, while the steady export growth will be a boon to the Korean economy.  

In May, the Organization for Economic Co-operation and Development (OECD) forecast Korea’s economy to expand at 2.6% in 2024, faster than its previous forecast of 2.2% on the prospect of recoveries in consumer spending and investment later this year, alongside robust export growth led by semiconductor chips.

It projected the country’s GDP growth will ease to 2.2% in 2025, while the BOK estimated 2.1% for the year.

Write to Jin-gyu Kang at josep@hankyung.com

Sookyung Seo edited this article.