Real Gross National Income (GNI) Decreases by 1.4% in Q2
Largest Drop in 2 Years and 9 Months Since Q3 2021
Rising International Oil and Commodity Prices Worsen Citizens' Financial Conditions
As prices of raw materials such as international oil and natural gas rise, the income of our citizens significantly decreased in the second quarter. With continued domestic demand sluggishness, our economy also contracted by 0.2% compared to the first quarter.
Real Gross National Income Drops Most in 2 Years and 9 Months in Q2
According to the provisional national income data for the second quarter released by the Bank of Korea on the 5th, the real Gross National Income (GNI) in Q2 decreased by 1.4% compared to the previous quarter. This is the largest decline in 2 years and 9 months since Q3 2021, which recorded -1.6%. It is also the first time in a year since Q2 last year (-0.9%) that real GNI recorded a negative figure.
Real GNI is an indicator representing the real purchasing power of income earned by our citizens both domestically and abroad. A decrease in real GNI can also be interpreted as a reduction in the economic capacity of the people. In fact, according to Statistics Korea, the average monthly real surplus amount of households with one or more persons nationwide has decreased for eight consecutive quarters from Q3 2022 through Q2 this year.
The decline in real GNI was largely influenced by the deterioration of terms of trade, which expanded real trade losses from 11.3 trillion won in Q1 to 16.6 trillion won in Q2. The rise in prices of raw materials such as international oil and natural gas in Q2 increased trade losses. When real trade losses grow, even if domestic production activities or exports are active, the income-increasing effect is minimal, eventually leading to consumption contraction and investment sluggishness.
Kang Chang-gu, head of the National Accounts Department at the Bank of Korea's Economic Statistics Bureau, explained, "In Q2, semiconductor prices rose, improving export conditions, but the rise in prices of international oil and gas worsened import conditions, leading to a deterioration in terms of trade."
Meanwhile, real net primary income from abroad also decreased further from 5.9 trillion won in the previous quarter to 4.4 trillion won. Real net primary income from abroad is the amount earned by our citizens abroad minus the amount earned by foreigners domestically. Kang said, "In Q2, dividends paid to foreigners increased, reducing real net primary income from abroad."
Q2 Economic Growth Rate -0.2%, Impacted by Domestic Demand Sluggishness
The real Gross Domestic Product (GDP) growth rate of South Korea in Q2 was recorded at -0.2% compared to the previous quarter. This figure is the same as the preliminary estimate announced in July. The economy showed negative growth for the first time in six quarters since Q4 2022 (-0.5%).
Exports continued to perform well, while domestic demand remained sluggish. Looking at the growth rate by expenditure items in Q2, exports increased by 1.2% quarter-on-quarter, centered on automobiles and chemical products. Imports also rose by 1.6%, mainly in energy products such as crude oil and natural gas, and petroleum products.
On the other hand, private consumption, an indicator of domestic demand, decreased by 0.2% quarter-on-quarter due to sluggish consumption of goods such as clothing and passenger cars. Construction investment also declined by 1.7% as both building construction and civil engineering decreased. Facility investment fell by 1.2% due to a reduction in machinery such as semiconductor manufacturing equipment.
Compared to the earlier preliminary estimate, facility investment (up 0.9 percentage points), exports (up 0.3 percentage points), and imports (up 0.4 percentage points) were revised upward, while construction investment (down 0.7 percentage points) and government consumption (down 0.1 percentage points) were revised downward.
Looking at the contribution to growth by expenditure items for Q2 GDP, all showed negative figures except government consumption (0.1 percentage points). Net exports recorded -0.1 percentage points, construction investment -0.3 percentage points, private consumption -0.1 percentage points, and facility investment -0.1 percentage points. This contrasts with Q1, where all areas except facility investment showed positive growth.
By sector, the private sector accounted for -0.2 percentage points, and the government for 0 percentage points, indicating that negative growth was driven by the private sector.
By economic activity, the decline in construction was prominent. Construction decreased by 6.0% as both building and civil engineering construction fell. Manufacturing increased by 0.8% quarter-on-quarter, centered on transportation equipment. Services maintained the previous quarter's level as decreases in information and communication, wholesale and retail, and accommodation and food services were offset by increases in transportation and real estate.
The GDP deflator, an index representing the overall domestic price level, rose by 4.8% year-on-year. The total savings rate in Q2 (35.2%) increased by 0.1 percentage points from the previous quarter, and the gross domestic investment rate (30.7%) rose by 1 percentage point quarter-on-quarter.
Kang Sung-jin, professor of economics at Korea University, evaluated, "The overall domestic demand recession has continued, worsening economic growth and national income conditions. Although exports are performing well compared to last year, overall consumption and investment conditions are not good."
However, Professor Kang added, "A mood for interest rate cuts is recently forming, so I do not think the domestic demand recession will be a major problem in the future. Policies to stimulate the economy have been postponed to prioritize lowering inflation, but if interest rates are lowered going forward, economic stimulation will occur, resolving the domestic demand recession."
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