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| Park Yang-su, head of the economic statistics department at the Bank of Korea (BOK), gives a briefing at the bank headquarters in Seoul, Tuesday. Yonhap |
'3Q contraction concerns overblown, as figures overshot potential output'
By Lee Kyung-min
While the spread of the Delta variant is expected to hurt the momentum of the country's economy amid sluggish vaccination progress since late June due to the shortage of vaccines, the Bank of Korea (BOK) said Tuesday the country's economy could be able to grow 4 percent this year.
Despite these challenges, the BOK pinned its rather positive stance on the country's trade performance, which remains strong and is the critical factor for its growth. South Korea is home to the world's top two memory chipmakers, Samsung Electronics and SK hynix. Demand for automotive chips, semiconductors and automotive parts will remain very solid.
With the country's latest GDP outcome, there are chances that the BOK may push back its policy rate hike after it hinted earlier of an impending monetary normalization. Some say the government's massive spending for relief packages could bring some economic backlash and that the country's overall economic outlook is largely reliant on its ability to cut the number of COVID-19 infection cases and achieve herd immunity.
The economy grew by 0.7 percent quarter-on-quarter in Q2, following a revised 1.7 percent increase in the previous quarter. GDP growth was much slower than expected in the latest quarter because of weaker exports and investment.
Korea in theory will meet the objective of 4 percent year-on-year growth, if it grows 0.7 percent in each of the remaining two quarters. Should the third-quarter growth slow to 0.5 percent, the following quarter must register 1.1 percent or greater to meet the objective.
Seoul National University economist Kim So-young said whether and how fast the fourth wave of infections is brought under control will determine the course of the economic growth. "The goal of 4 percent growth is not at all a foregone conclusion, given the uncertainties involving the virus, financial market and economic conditions."
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Exports registering a worrisome 2 percent quarter-on-quarter contraction in the April-June period is mostly due to the base effect from a strong performance three months earlier.
This is why the central bank considers the fears of a third-quarter contraction and concerns over a deeper-than-feared recession in the months to come to be overblown. Also anchoring the view is growth figures thus far having overshot the country's potential growth of 2.5 percent. Potential GDP is an estimate of the output that would have been produced by the economy with labor and capital at their maximum sustainable rates, without triggering inflation.
"The second-quarter figures might seem concerning, especially since exports logged 41.2 percent, 45.6 percent and 39.7 percent increases in April, May and June, year-on-year respective. Factoring in the base effect, the figures do not pose that much of a problem," said Park Yang-su, head of the bank's economic statistics department.
The slowdown in consumption will be limited, since the shutdown of businesses and subsequent dent in their profits are increasingly isolated only to a few in-person hospitality and leisure service industries. Spending will not be adversely affected any more than previously expected, since continued ebb and flow in the number of new caseloads over the past year will no longer translate into consumer overreaction.
"Consumer sentiment experienced the sharpest drop in the first wave of the pandemic, but a growing number of consumers have since learned not to panic as much as the country experienced during the second and third waves of the virus," he said.
Indices compiled by the statistics department of the central bank on consumer sentiment showed the figures dipping no deeper than they did in the first wave, according to the official. Credit card spending figures are not enough to measure the impact yet, because only sales records as recent as July 15 are available for statistical analysis. The stricter Level 4 social distancing rules took effect July 12.
The second supplementary budget of 34.9 trillion won ($30.3 billion) will lead to the country's GDP rising significantly higher than an increase of up to 0.2 percentage points, an estimate made by BOK Governor Lee Ju-yeol.
"The first supplementary budget of 14.9 trillion won was expected to translate to the economy experiencing a growth increase of between 0.1 and 0.2 percentage points from the initial projections. The second extra budget is about two times greater, so the contribution will be greater," the central bank official said.
