South Korea’s economy continued to grow slowly throughout the year of 2023 with an annualized growth rate in the low 1 percent range. Exports are expecting it to continue to improve, but a strong rebound is unlikely this year as domestic demand remains weak.
The Bank of Korea (BOK) released preliminary data on Jan. 25. The data show that the country’s real gross domestic product (GDP) grew at an annualized rate of 1.4 percent in 2023. This is the result of four consecutive quarters of year-on-year growth in the zero-percent range, including 0.3 percent in the first quarter and 0.6 percent in each of the second through fourth quarters. While the 1.4 percent annualized growth rate is in line with the Korean government’s and BOK’s forecasts, it is a significant drop from 4.3 percent in 2021 and 2.6 percent in 2022. It is the lowest in three years after -0.7 percent in 2020 at the height of the COVID-19 pandemic and, excluding that, the lowest since 0.8 percent in 2009 at the height of the global financial crisis.
By expenditure category in 2023, construction investment and equipment investment increased by 1.4 percent and 0.5 percent, respectively, returning to growth since -2.8 percent and -0.9 percent in 2022, but high inflation and interest rates significantly reduced consumption, pulling down the growth rate. The annualized growth rate of private consumption slowed to 1.8 percent last year from 4.1 percent in 2022, while government consumption shrank to 1.3 percent from 4 percent.
The South Korean economy is faced with a decrease in private consumption, which accounts for more than 50 percent of the economy. Last year’s private consumption growth was the lowest in a decade since 1.7 percent in 2013, excluding -4.8 percent in 2020 when COVID-19 hit South Korea. Private consumption’s contribution to GDP growth also fell to 0.9 percentage points last year from 1.9 percentage points in 2022.
South Korea’s exports and imports also grew at a slower pace (2.8 percent and 3 percent, respectively) in 2023 compared to 2022 (3.4 to 3.5 percent). However, as the information technology (IT) economy market improved in the second half of the year, exports, mainly semiconductor exports, showed a clear rising trend. As a result, the contribution of net exports (exports minus imports) to GDP growth (quarter-on-quarter), which was -4.2 percentage points in the first quarter of 2023, gradually expanded to -0.8 percentage points in the second quarter, 1.5 percentage points in the third quarter, and 2.8 percentage points in the fourth quarter, and became the driving force behind gradual growth in the first half and sharp growth in the second half expected by the government and the BOK.
The BOK’s economic growth forecast for this year is 2.1 percent. While growth is still expected to be low, a potential growth rate of around 2 percent, the situation is expected to be slightly better than last year due to improved exports and facility investment.
The IT industry holds the key. “The 2.1 percent growth forecast is predicated on the premise of a recovery in IT exports such as semiconductors exports,” said Lee Chang-yong, governor of the BOK, on Dec. 20, 2023. “Internally, we expect the growth rate to be around 1.7 percent excluding the IT sector.” Possible fluctuations in international oil prices due to geopolitical risks in the Middle East are also still a factor.
On the other hand, there is growing concern that the current low-growth trend will be prolonged. This is due to a combination of declining productivity due to demographic changes such as low fertility and aging, the rise of China and India, and a reorganization of global supply chains. “Various organizations are making gloomy forecasts that South Korea’s potential growth rate will fall to 1 percent or even 0 percent in the future,” Shin said, adding that efforts by economic actors including the government are needed.