'Government 3 : Private 1'... Fiscal GDP Contribution Highest in 10 Years

Last Year's GDP Growth Rate at 2%, Private Sector Contribution Only 0.5%P
Fiscal Concentrated Spending in Q4...Central Budget Execution Rate Reaches 97%
Nominal GDP Growth Expected to Remain in 1% Range...Assessment of Entering Deflation

Park Yang-su, Director of the Economic Statistics Bureau at the Bank of Korea, is briefing at the press conference on the preliminary real Gross Domestic Product (GDP) for the 4th quarter and the annual results of 2019, held on the 22nd at the Bank of Korea in Jung-gu, Seoul. Photo by Moon Ho-nam munonam@

[Asia Economy Reporters Sim Nayoung, Kim Eunbyeol, Kim Minyoung] Last year, South Korea barely achieved growth in the 2% range, largely due to the government's final round of monetary stimulus. Although the private sector still showed sluggish performance, the government’s expansionary fiscal policy helped boost the growth rate. There are also forecasts that the nominal growth rate, which reflects price fluctuations, will remain in the 1% range.

◆ Growth Rate Boosted by the Government = According to the Bank of Korea on the 22nd, the government’s contribution to last year’s annual Gross Domestic Product (GDP) growth rate of 2.0% was 1.5 percentage points. The private sector’s contribution was only 0.5 percentage points. This means the government accounted for 75% of the total GDP growth, covering about three times the growth contributed by the private sector through government spending. In 2018, the growth rate was 2.7%, with the private sector contributing 1.8 percentage points and the government 0.9 percentage points. The government’s share of contribution, which was around 33%, surged sharply within a year. The government’s GDP contribution is also the highest since the financial crisis period (2009, 2.3 percentage points) when the private sector’s contribution was negative. In particular, the government significantly increased fiscal spending in the fourth quarter of last year. In the fourth quarter, the growth rate was 1.2%, with the government contributing 1.0 percentage point and the private sector 0.2 percentage points, making the government’s share 83%.

According to the Ministry of Economy and Finance, as of the end of December last year, over 97% of the initially targeted central government budget was executed. Although the local government budget execution rate fell short of the 90% target, it was recorded at 86.87%, higher than the 84.2% in 2018, indicating increased spending. More than 98% of the supplementary budget (58 trillion won) was executed. Considering that as of the end of November last year, the central government’s execution rate was 90.3% and the local government’s was 77.1%, the fiscal execution rate increased by more than 6 percentage points for the central government and nearly 10 percentage points for local governments in December alone. While the execution rate itself rose by only about 2-3 percentage points compared to a year earlier, the amount spent had a compensatory effect on the economy, such as the supplementary budget. Even a 1% increase in the central government budget (470 trillion won) amounts to 4.7 trillion won. A Ministry of Economy and Finance official stated, “Although it is difficult to say that the budgets executed by the central and local governments contributed solely to GDP, the reduction in budget carryovers and unused funds means more spending, which helped raise the growth rate,” adding, “The government’s efforts to improve fiscal execution rates had a compensatory effect on the economy beyond the supplementary budget.”

However, Park Yangsoo, Director of the Economic Statistics Bureau at the Bank of Korea, positively evaluated that the private sector’s GDP contribution remained positive on a quarterly basis. He said, “The private sector continues to improve,” adding, “Although exports declined, consumption and investment improved, so these factors should be considered together.”

◆ Nominal GDP Growth Rate Expected to Remain at 1% = The nominal GDP growth rate for last year, to be announced in March, is estimated to be in the 1% range, leading to assessments that the economy has effectively entered deflation. While economic growth rates use real GDP growth applying base year prices, nominal GDP reflects market prices of the respective year, thus being closer to the perceived economic conditions.

Director Park said, “The GDP deflator has continuously shown negative values, so the nominal growth rate is expected to be lower than the real growth rate,” adding, “Since the nominal growth rate was about 1% up to the third quarter of last year, this trend is likely to continue.” South Korea’s nominal GDP growth rate has never fallen below 3% since recording -1.1% in 1998, the year following the International Monetary Fund (IMF) crisis.

The rate of change in the GDP deflator, which is nominal GDP divided by real GDP (year-on-year), is also showing an increasing decline. It dropped from -0.1% in the fourth quarter of 2018 to -0.5% in the first quarter of 2019, -0.7% in the second quarter, and -1.6% in the third quarter, with the decline deepening. Unlike the Consumer Price Index, which measures prices closely related to consumers, the GDP deflator reflects the overall price level of the national economy.

Professor Sung Taeyoon of Yonsei University said, “Nominal GDP is inevitably much lower than current real GDP,” adding, “There is no choice but to see this as a deflation concern.” He also said, “Although the real growth rate reached 2%, the strong downward trend indicates worsening economic stagnation,” and “The preliminary GDP figures are unlikely to achieve 2% growth.” Meanwhile, last year’s Gross National Income (GNI) is expected to be lower than the 33,346 dollars level of 2018. Director Park said, “Due to a 4-5% depreciation in the exchange rate last year, GNI is expected to be around 32,000 dollars.”