[Insight & Opinion] Polarization Worsening Deserves More Attention Than Growth Rate Improvement

Polarization Between High-Tech and Traditional Industries Becomes More Evident
Structural Issues in the Korean Economy Must Be Addressed

The Bank of Korea has revised its growth forecast for this year upward from 2.1% in February to 2.5%. Following the Organisation for Economic Co-operation and Development (OECD), which raised South Korea's economic outlook from 2.2% in February to 2.6% in May, the Korea Development Institute also adjusted its forecast to the same figure. The basis for raising the growth forecast is that the first quarter economic growth rate came in at 3.4% year-on-year, and exports have performed better than initially expected. However, despite the encouraging economic growth rate this year, it is also important to note that there are several uncomfortable issues embedded within.

First, the 1.3% quarter-on-quarter growth rate in Q1 may have been overestimated. In terms of industrial growth contributions, manufacturing showed 0.3 percentage points (p.p.), but manufacturing output actually decreased by 0.5% quarter-on-quarter in industrial production for Q1. The service sector's growth contribution was estimated at 0.4 p.p., but industrial production showed only a 0.2% increase.

Additionally, among domestic demand growth contributions, private consumption was estimated at 0.4 p.p., but consumption in industrial production decreased by 0.2%. Also, the growth contribution of facility investment was estimated to have decreased by 0.1 p.p., but industrial production showed a 1.2% decline. This significant discrepancy between the national income account estimates and industrial production statistics suggests that the finalized GDP figure for Q1 may be revised downward from the current 1.3% growth rate.

Second, there is a question of whether the high growth in Q1 can be sustained. Breaking down the 1.3 p.p. growth contribution, domestic demand accounted for 0.7 p.p., larger than net exports at 0.6 p.p., indicating that Q1 growth was driven by domestic demand. Final consumption expenditure and total investment each increased by 0.5 p.p. However, as previously pointed out with the inconsistency in industrial production statistics, there is doubt whether domestic demand can continue its strong growth momentum.

Meanwhile, the Korea Development Institute's rationale for raising this year's growth forecast by 0.4 p.p. is that the export growth rate is increasing while the import growth rate is decreasing, thereby raising the growth contribution of net exports. However, as shown by the decline in the U.S. economy's Q1 growth rate, which currently leads global economic growth, if it shifts into recession, South Korea's export-driven growth may be lower than expected.

Third, the most critical issue to note is whether the current polarization trend in the economy can improve even if the economy grows at a rate of 2.5% to 2.6% this year. Total exports from January to April this year increased by 9.5%, but the export growth rate excluding semiconductors was only 2.9%. Meanwhile, the manufacturing producer production index in Q1 rose 6.1% year-on-year, but excluding semiconductors, it decreased by 1.2%. Large enterprises increased by 7.9%, but small and medium enterprises decreased by 8.4%. The service sector's total index in Q1 increased by 2.1% compared to Q1 last year, but most livelihood-related industries showed declines, such as food and beverage establishments down 2.8%, food and beverage retail down 16.9%, and textile, clothing, footwear, and leather retail down 12.3%, clearly showing a polarization pattern.

The policy implication suggested by the problems embedded in this year's Q1 growth rate is that the government should not be misled by the positive effects of upward revisions beyond expectations and take lightly the structural problems facing the Korean economy. The current administration has emphasized the virtuous cycle of growth-oriented policy management, but the polarization between the export and domestic sectors and between high-tech industries and traditional industries is becoming increasingly severe. The issue of self-employed individuals is a representative example. The government should note that ignoring the deepening polarization while relying on the trickle-down effect of growth will worsen side effects and ultimately hinder growth.

Kim Dong-won, Former Visiting Professor at Korea University