[Q&A] Bank of Korea: "Achieving 4.0% Annual Growth Possible with 0.7% Growth in Q3 and Q4"

Park Yang-su, Director of Economic Statistics Bureau at BOK Briefing
Q2 Economic Growth Rate Increased by 0.7% Quarter-on-Quarter

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The Bank of Korea forecasted that if the economy grows by 0.7% in the 3rd and 4th quarters, an annual growth rate of 4.0% is achievable.

According to the Bank of Korea on the 27th, South Korea's real GDP growth rate in the 2nd quarter was recorded at 0.7% compared to the previous quarter. This marked the fourth consecutive quarter of growth following 2.2% in Q3 last year, 1.1% in Q4, and 1.7% in Q1 this year. Year-on-year growth was 5.9%.

Park Yang-su, Director of the Economic Statistics Department at the Bank of Korea, stated at a press briefing on the 2nd quarter real GDP held at the Bank of Korea headquarters in Seoul, "If growth reaches 0.7% in the 3rd and 4th quarters, an annual growth rate of 4.0% is possible." He added, "Since the 2nd quarter growth rate is higher than the potential growth rate, there is no need for excessive concern."

▲ How severe is the economic impact compared to the 1st to 3rd waves of the COVID-19 pandemic?

= During the first wave of COVID-19, consumer sentiment deteriorated significantly. Since it was an unprecedented situation, there was a general sharp contraction. This led to declines in both services and goods. During the second wave, psychological contraction was less severe. In the early stages, beauty and personal care services and education sectors were shut down, but now the education sector has been replaced by online classes. Currently, the impact is concentrated in the food, accommodation, and entertainment sectors. The Bank of Korea has been releasing a weekly news sentiment index recently, and the decline in this index is much smaller than during the first wave. Consumer sentiment contraction is not significant.

▲ Is there a possibility of revising the economic outlook due to the 4th wave of COVID-19?

= When the Q1 GDP growth rate was announced, it was stated that if the Q2 growth rate reached the high 0.6% to 0.7% range, an annual 4.0% growth would be achievable. The current growth is following that forecast. Combining Q1 and Q2, the growth rate is 1.6 to 1.7%, which aligns with market expectations. It was 0.2 percentage points higher than the forecast by the Research Department. However, the future growth path will be determined by the 4th wave of COVID-19.

▲ Is there a possibility that the Q3 growth rate will record a negative quarter-on-quarter figure?

= Looking back at the foreign exchange crisis, growth initially surged sharply but then gradually declined toward the base level. Initially, growth was high but then decreased, remaining above the potential growth rate. Afterwards, it fell below the potential growth rate, showing a recession phase. A similar pattern was observed during the global financial crisis. After an initial recession, growth rates rose sharply and then stabilized. Since the Q2 growth rate was 0.7%, which is above the potential growth rate, there is no need to worry based on the Q2 figures. It is still difficult to predict a negative Q3 based on Q2 data. There is no need to be overly pessimistic.

▲ How should we interpret the -2.0% export figure?

= The export growth rate based on customs clearance was 20.4% in Q2 2020 and 42.1% in Q2 2021. A 20-30% negative figure generally reflects a base effect. If the Q3 forecast is excessively low, it means there was some overly optimistic sentiment earlier. The rise in export prices was somewhat overlooked. Since the second half of last year, strong export momentum has driven growth recovery. However, the growth rate has declined since Q1, and Q2 was already at a very high level. The -2.0% figure is somewhat concerning. It reflects a negative volume growth in exports due to factors such as supply issues in automotive semiconductors.

▲ How much effect does the 2nd supplementary budget (추경) have on future GDP growth?

= The effects of the main budget and supplementary budgets on GDP are not separately distinguished. However, the first supplementary budget (14.9 trillion KRW) had an effect of raising annual GDP by 0.1 to 0.2 percentage points. Since the second supplementary budget (34.9 trillion KRW) is slightly more than twice the first, its effect is expected to be greater.