South Korea Economy Unexpectedly Contracts as Investment Falters

Royal Dutch Shell Plc's Prelude floating liquefied natural gas (FLNG) facility in its completed state is illuminated at dusk at the Samsung Heavy Industries Co. shipyard in Geoje, South Korea, on Tuesday, June 27, 2017. Samsung Heavy is one of the world's three biggest shipbuilders. Photographer: SeongJoon Cho/Bloomberg , Bloomberg

Jungah Lee, Bloomberg News

Apr 24, 2019

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(Bloomberg) -- South Korea’s gross domestic product shrank the most in a decade as declining investment and exports take a toll on Asia’s fourth-largest economy.

  • GDP shrank 0.3 percent in the first quarter from the previous three months, compared with a median estimate from economists for a 0.3 percent gain. From a year earlier, the economy expanded 1.8 percent, compared with projections of 2.4 percent.

Key Insights

  • South Korea is highly exposed to slowing in global growth and the technology sector, which have combined to crimp the nation’s GDP in recent quarters.
  • The Bank of Korea last week reduced its 2019 growth forecast to 2.5 percent while the government topped up its spending plans with the announcement this week of an extra budget to shore up the economy.
  • BOK Governor Lee Ju-yeol blamed weakening exports, particularly of semiconductors, and slowing business investment for the growth downgrade. But he said exports and capital spending were likely to improve in the second half of the year.
  • The government’s supplementary package of 6.7 trillion won ($5.9 billion) comes on top of a main budget that is already a record and a hefty increase from last year. The extra budget may push up GDP by 0.1 percentage point and create at least 73,000 new jobs, according to the government.
  • Yet it might still be "quite challenging for South Korea’s GDP growth to achieve the government’s 2.6-2.7 percent forecast," said Krystal Tan, economist at Australia & New Zealand Banking Group in Singapore. "Unless a stronger-than-expected recovery in the export sector materializes in the coming months, a bigger extra budget would probably be needed to push growth into that band."

What Bloomberg’s Economists Say

"South Korea’s proposed supplementary budget, at 6.7 trillion won ($5.9 billion), adds further support to a slowing economy. ... It is likely to provide only a slight bump to growth -- probably just enough to offset weakness in investment and exports."

--Justin Jimenez, economistClick here to view Korea Insight

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  • Facilities investment fell 11 percent in the first quarter from the previous three months, the biggest drop in 21 years, after rising 4.4 percent in the previous quarter. Construction investment declined 0.1 percent from the earlier period, when it gained 1.2 percent.
  • GDP export volumes fell 2.6 percent from the previous three months, when they declined 1.5 percent, according to the BOK.
  • Import volumes fell 3.3 percent, following a 1.5 percent increase in the previous quarter.
  • Government spending rose 0.3 percent, following a 3 percent increase.
  • Private spending also gained 0.1 percent.

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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