South Korean Economy Shrinks 0.34% in First Quarter

The South Korean economy is estimated to have contracted 0.34 percent in the first quarter of the year from the previous quarter, the Bank of Korea announced on April 25.

The central bank attributed the unexpected negative growth of Korea’s gross domestic product to a drop in capital investment and falling exports.

The estimate marks the lowest growth since the fourth quarter of 2008, when the Korean economy shrank 3.3 percent on-quarter. It also represented the first negative growth in five quarters.

The economy’s poor performance in the first quarter raised pessimism about Korea's economic outlook throughout the business community.

Economic analysts say that although they expected the first quarter performance would not be good, they did not expect it to be so bad. The Bank of Korea also said that it "regards it as a shock."

Private sector spending and government spending increased 0.1 percent 0.3 percent, respectively. But exports decreased 2.6 percent and facility investment plunged 10.8 percent. Construction investment also fell -0.1 percent. Although private consumption increased in the first quarter, the growth rate is the lowest level in nine quarters since a 1.4 percent gain in the fourth quarter of 2016.
 

In particular, facility investment fell most sharply since the first quarter of 1998 when it plummeted 24.8 percent following the outbreak of a foreign exchange crisis.

In fact, companies are suffering from sluggish exports and changes in their business environment, such as a hike in minimum wage and shorter working hours.

A case in point is LG Electronics' recent decision to withdraw its smartphone production lines from Korea. LG Electronics had initially produced smartphones at its Pyeongtaek plant, but decided to halt production in Korea as a desperate measure to reduce losses. Domestic production will be replaced by production in Vietnam and Brazil, where production costs are low, as early as June. LG Electronics also decided to reduce its domestic manufacturing workforce by 700 to 780 workers.

"Although the major reason for LG Electronics’ latest decision is the chronic deficit of its division in charge of the smartphone business, it nevertheless shows that the business environment in South Korea is not that good," said an industry insider.

SK Hynix, which announced its first quarter performance on the same day, said it will delay the timing of increasing the output of its Cheongju plant, which was completed in the second half of last year. This shows that the semiconductor business has worsened to the point of stopping the operation of factories that have already been built.

SK Hynix posted an operating profit of 1.37 trillion won in the first quarter of this year, down 68.7 percent from a year earlier and down 69 percent from the previous quarter. Its operating margin stood at 20 percent, down 25 percentage points from 45 percent in the previous quarter. SK Hynix's operating profit in the first quarter of this year is at its lowest level in 10 quarters since 726 billion won in the third quarter of 2016.

Semiconductor exports account for about 20 percent of Korea's total exports, but have been on the decline for four months, with -8.4 percent in December, -23.3 percent in January, -24.8 percent in February, and -16.6 percent in March. Samsung Electronics also posted 6.2 trillion won in operating profit in the first quarter of this year, down 60.4 percent from a year earlier and 42.6 percent from the previous quarter. Sales remained at 52 trillion won, more than 1 trillion won lower than market expectations.
 

"We are currently scaling back the operation of production facilities because the semiconductor business is in a downturn," said an official of a semiconductor company. "Samsung Electronics and SK Hynix have also been reducing production facilities in South Korea since last year."

By industrial sector, the manufacturing industry contracted 2.4 percent on-quarter due to a drop in electricity, electronic devices and chemicals. The construction industry posted negative 0.4 percent growth. The service industry expanded 0.9 percent while the agro-forestry-fishery sector posted 4.7 percent expansion.

In the case of automobiles, labor disputes at major auto companies negatively affected consumption, as these companies could not properly meet orders, let alone increase production facilities.

Park Yang-soo, director-general of the BOK's economic statistics bureau, cited labor disputes at auto companies as a cause for sluggish private consumption. He said that despite the large number of orders for cars, the consumption of passenger cars fell due to supply disruptions caused by the labor disputes.

Despite worsening industry-wide indicators, the central bank said the national economy would grow 2.5 percent this year. It forecast that the economy would be able to grow 1.2 percent on quarter in the second quarter thanks to the low base effect (the negative 0.3 percent growth in the first quarter). If the economy maintains 0.8 to 0.9 percent growth on quarter in the third and fourth quarters, the economy will be able to achieve 2.5 percent growth this year.

On the other hand, experts at private research institutes say that the economy would not be able to achieve growth in the mid-2 percent range.

Lee Seung-seok, a researcher at the Korea Economic Research Institute, said, "Although the semiconductor business is forecast to rebound in the second half of this year, we cannot guarantee that it will pick up in the second half considering the falling demand and the downward pressures on semiconductor prices due to increased competition among companies." He added, "The government should take the double-digit decline in facility investment seriously. Unless facility investment rebounds, the economy will not be able to achieve the mid-2 percent economic growth rate this year."

Business executives complain that the government is overly optimistic about the situation. "As the minimum wage has risen sharply, self-employed businesses and small and medium-sized enterprises are suffering, and they are reducing employment. Increased employment instability shrinks consumption," said an official of a retail conglomerate.

"It is not right to ask for corporate investment at a time when the government has been dragging down business activities through a hike in the minimum wage and corporate taxes," said an official of a small company.

Hong Joon-pyo, a researcher at the Hyundai Research Institute said that sluggish exports are mainly to blame for the negative economic growth in the first quarter. He added that a swift implementation of the proposed supplementary budget is needed to prevent a further decline in GDP growth.