Economy, Is It Really Recovering? [Why&Next]

GDP Growth Rate Exceeded Expectations but March Industrial Production Slowed
Differences in Statistical Compilation Methods Cited, Yet Economic Uncertainty Grows
OECD Raises South Korea Growth Forecast, Government and Bank of Korea Also Upgrade Outlook

Although South Korea's economic growth rate in the first quarter significantly exceeded expectations, subsequent industrial activity indicators showed a slowdown, causing confusion in interpreting the economic data. The government and the Bank of Korea explained that the differences in statistics were due to variations in data compilation methods, affirming that the economy is indeed improving, but they expect economic uncertainties to persist going forward.

According to the industrial activity trends announced by Statistics Korea on the 30th of last month, total industrial production in March decreased by 2.1% compared to the previous month. Total industrial production, which reflects the domestic economic trend, had been increasing for four consecutive months since November last year but turned to a decline in March. The decrease was the largest since February 2020 (-3.2%) during the COVID-19 period, marking the biggest drop in four years and one month.

With the poor performance in March, total industrial production for the first quarter increased by only 0.7% compared to the previous quarter. This falls significantly short of the Bank of Korea's earlier announced preliminary first-quarter real Gross Domestic Product (GDP) growth rate of 1.3%. The industrial production index by Statistics Korea, along with GDP, is a key indicator of economic trends, but the large discrepancy between the two has caused confusion.

Hanaro Mart Yangjae Branch, Seocho-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Significant Differences in Consumption and Exports

Examining the detailed components reveals large differences between the two statistics in consumption and exports. The GDP statistics showed that private consumption grew by 0.8% in the first quarter compared to the previous quarter, whereas the retail sales index in the industrial activity trends decreased by 0.2%. Similarly, exports in the first quarter grew by 0.9% quarter-on-quarter in the GDP data, but manufacturing exports in the industrial activity trends fell by 1.5%. There were significant discrepancies in the consumption and export sectors, which are core to the Korean economy.

The government explained that these differences arise from the distinct statistical compilation methods used by each side, but the economy did improve in the first quarter. For consumption, the industrial activity trends only account for retail sales of durable and semi-durable goods, while GDP consumption includes all consumption activities such as retail and service sales, leading to differences in results. Regarding exports, the industrial activity trends cover a narrower scope, while GDP exports include products made by Korean companies overseas, resulting in broader coverage and differences in figures.

Lee Seung-han, Director of the Comprehensive Policy Division at the Ministry of Economy and Finance, stated, "The Bank of Korea's GDP statistics are based on a census survey, whereas the industrial activity trends are sample surveys with a smaller scope," adding, "For understanding overall economic trends, it is better to refer to GDP statistics." A Statistics Korea official also noted, "The compilation methods differ in detailed items," and explained, "Total industrial production, which is timely, is useful for observing short-term economic trends, while GDP is appropriate for grasping the overall economic situation."

Export containers are loaded onto a ship at Busan North Port. Photo by Jinhyung Kang aymsdream@

March Indicators Worsen, Increasing Uncertainty in Economic Outlook

Despite the government's explanation, the poor industrial activity trends in March compared to January and February are expected to sustain concerns about economic slowdown. Particularly, most industrial indicators excluding semiconductors showed negative results, fueling these worries.

Manufacturing production excluding semiconductors fell by 4.3% in March, a decline 0.8 percentage points larger than the overall manufacturing production. This was influenced by decreases in electronics and telecommunications (-3.2%) and automobiles (-0.9%). The manufacturing production diffusion index, which reflects the sentiment of the industrial sector, also dropped to 38.2, the lowest level since July last year (38.2).

The government attributed the poor March figures to a base effect following improvements in January and February, but some analyses suggest it indicates weak domestic demand. Jin-kyung Lee, an economist at Shinhan Investment Corp., said, "March total industrial production turned negative even in IT items that had been recovering, giving back all the gains from February," diagnosing that "while proactive inventory accumulation occurred since the beginning of the year, demand recovery, especially domestically, has been slower than expected."

March consumption rebounded but was assessed as weak in sustainability. The economist added, "The private consumption surprise in the first-quarter GDP was largely due to early government budget execution," and predicted, "Although consumption sentiment is supported by rising asset prices, reducing the likelihood of a sharp consumption downturn, a delay in interest rate cuts and employment slowdown will inevitably weaken consumption momentum."

Researcher Jin-sung Kim of Heungkuk Securities also evaluated, "Looking at the industrial activity trends, production, investment, and consumption in the first quarter were mostly lower than in the fourth quarter of last year," indicating "the overall domestic economic recovery, especially the vitality of domestic demand, is very narrow and shallow."

With the poor March total industrial production, there is speculation that the Bank of Korea's preliminary first-quarter economic growth rate may be revised downward in the upcoming provisional release. This is because the preliminary statistics do not fully reflect the indicators for the final month of the quarter due to the timing of data compilation. A Bank of Korea official said, "Due to the timing characteristics, the first-quarter GDP preliminary estimate includes March statistics as projections," adding, "This partly explains the differences with Statistics Korea's indicators."

OECD Raises South Korea's Economic Growth Forecast to 2.6%

The Bank of Korea is expected to raise its economic growth forecast for South Korea in the revised economic outlook to be announced on the 23rd of this month, and how much these factors will be reflected is a point of interest. The market anticipates that the Bank of Korea will raise this year's economic growth forecast from 2.1% to the mid-2% range. If industrial activity indicators continue to be weak in April following March, the upward revision of the growth forecast may be smaller than expected.

The Organisation for Economic Co-operation and Development (OECD) also raised its growth forecast for South Korea from 2.2% to 2.6% the day before. The OECD's forecast is higher than those of other major institutions such as the International Monetary Fund (IMF) at 2.3%, the government at 2.2%, and the Korea Development Institute (KDI) at 2.2%. The OECD's significant upward revision is interpreted as a response to the first-quarter economic growth exceeding expectations.

The OECD assessed that the Korean economy will "move out of a temporary lull phase and strengthen its growth momentum." It expects continued export growth driven by semiconductor demand recovery and a domestic demand recovery in the second half of the year following interest rate cuts, despite the previous weak domestic demand due to high interest rates and inflation. The OECD also raised its growth forecast for the Korean economy next year from 2.1% to 2.2%. Inflation forecasts improved as well, with prices currently hovering near 3% expected to gradually stabilize toward the end of the year. The consumer price inflation rate is projected to be 2.6% this year and fall to 2.0% next year.

The OECD also raised its growth forecasts for the United States from 2.1% to 2.6%, and for China from 4.7% to 4.9%. The global economic growth forecast for this year was revised upward from 2.9% to 3.1%.