Bank of Korea: "Rising International Oil Prices Worsen Terms of Trade... Factor Lowering Real GNI" [Q&A]

Q2 National Income (Preliminary) Press Briefing
Real GNI Down 1.4% QoQ
Due to Deterioration in Terms of Trade and Decrease in Net Primary Income from Abroad

The Bank of Korea explained on the 5th that the real Gross National Income (GNI) in the second quarter fell short of the real Gross Domestic Product (GDP) due to the deterioration of terms of trade caused by rising prices of imports such as crude oil and natural gas, and the decrease in net primary income from abroad due to increased dividend payments to foreigners.

Kang Chang-gu, Director of the National Accounts Department at the Bank of Korea, said at a press briefing immediately after the announcement of the 'Second Quarter National Income (Provisional)' that the reason for the 1.4% decrease in real GNI in the second quarter was "two factors: the deterioration of terms of trade and the decrease in real net primary income from abroad, which lowered real GNI." He explained, "Recently, the price increase rate of imports such as crude oil and natural gas rose higher than that of semiconductors, worsening the terms of trade, and as dividend payments to foreigners increased, the amount paid exceeded the amount received, reducing net primary income from abroad."

Regarding the larger decrease in construction investment and facility investment compared to the preliminary estimate, he explained, "In the case of facility investment, investment in ships was better than in the preliminary estimate, and construction investment decreased reflecting the government's construction investment execution performance."

On the possibility of an economic downturn in the second half of the year due to negative growth in the second quarter, he said, "Just because there was negative growth in the second quarter does not mean that domestic demand contraction will deepen," adding, "There is a possibility that the pace of domestic demand recovery will accelerate somewhat from the second half."

Regarding the possibility of achieving the annual growth rate forecast, he said, "We expect to meet the annual growth rate forecast, the same as in the previous Economic Outlook."

Below is a Q&A with Kang Chang-gu, Director of the National Accounts Department.

- What factors influenced the decrease in real GNI?

▲ Both the deterioration of terms of trade and the decrease in real net primary income from abroad simultaneously affected it. Since Korea is a small open economy, it is greatly influenced by terms of trade. Recently, the price increase rate of imports such as crude oil and natural gas rose higher than that of semiconductors, worsening the terms of trade. Also, net primary income from abroad decreased compared to the previous quarter. Even considering seasonal factors such as increased foreign dividends in the second quarter, the increase in foreigners' holdings of domestic stocks led to higher dividend payments abroad, making payments exceed receipts. These two factors lowered real GNI.

- What caused the larger fluctuations in construction and facility investments compared to the preliminary estimate?

▲ Facility investment is divided into machinery and transportation equipment, and transportation equipment, especially ships, was better than the preliminary estimate. The decrease in construction investment reflects the government's construction investment execution performance, which lowered the figure.

- Is it possible to achieve the annual growth rate forecast presented in August?

▲ The second quarter growth rate had a base effect due to strong growth in the first quarter. In the previous Economic Outlook, the forecast for the second half of the year was that exports would continue to perform well, corporate investment capacity would increase, and households would show recovery trends due to improved real income as inflation slows. I share the same view. We expect to meet the annual growth rate forecast.

- The annual growth rate forecast was lowered by 0.1 percentage points last month. Does this mean an economic downturn in the second half is becoming apparent?

▲ Negative growth in the second quarter does not necessarily mean a deepening domestic demand contraction. There is a possibility that the pace of domestic demand recovery will accelerate somewhat from the second half. According to recently released industrial activity trends, retail sales were sluggish, but the consumer sentiment index exceeded 100, indicating a not bad situation, and the service production index showed positive growth for two consecutive months. Considering these positive factors, domestic demand is not expected to contract nor the economy to worsen in the second half.

- What caused imports to increase by 0.4 percentage points compared to the preliminary estimate?

▲ Imports increased mainly in energy products such as natural gas and petroleum products like naphtha. Overall, raw materials increased significantly. In service imports, transportation services increased.

- Is facility investment expected to decrease in the second half as well?

▲ In the first half, companies adjusted investment speed to secure profitability rather than expand market share. Since imports have increased significantly in the second half, facility investment is expected to be favorable.

- Is the contribution of net exports expected to decline in the second half?

▲ Net exports were positive for four consecutive quarters but turned negative in the second quarter. Historically, net exports do not continue steadily but tend to adjust once and then turn positive again. In the second half, IT exports are expected to remain strong, with semiconductors still performing well. However, as imports rise, the contribution of net exports will decrease compared to the first half but is expected to remain positive.