South Korea Growth Tepid as Property Risks Offset Export Bounce

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(Bloomberg) -- South Korea’s simmering credit risks weighed on construction activity last quarter, holding economic growth in check even as exports maintained momentum and adding to concerns for President Yoon Suk Yeol ahead of parliamentary elections crucial to his policy initiatives.

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Gross domestic product expanded 0.6% in the three months through December from the previous quarter, the Bank of Korea said Thursday. It was the same pace as in the July-September period, and the figure matched the consensus forecast. From a year earlier, the economy grew by 2.2%.

Construction investment took the biggest hit in the period, shrinking 4.2% from the previous three-month period and marking its biggest drop since the first quarter of 2012. Meanwhile, exports in real terms increased 2.6%, as facilities investment advanced 3%, underscoring the recovery of the manufacturing engine at the heart of the economy.

Higher interest rates have put a strain on Korea’s credit markets since the Bank of Korea began a tightening cycle in 2021 to wage a fight against inflation earlier than most peers in the developed world. The latest credit crisis involves local developer Taeyoung E&C, and policymakers have urged financial institutions to increase provisioning for losses on construction-related debt.

The latest data may give the BOK confidence it can keep its policy rate at current levels, which authorities characterize as restrictive.

What Bloomberg Economics Says...

“This should give the Bank of Korea room to keep its tight policy rate on pause for an extended period, so it can fight the last mile of its campaign against inflation and curb excessive leverage.”

— Hyosung Kwon, economist

Click here to read the full report

The outlook for the construction industry isn’t looking any better this year, and a series of elections both at home and abroad are adding to economic uncertainties for South Korea. The central bank’s reluctance to reduce borrowing costs anytime soon even as the Federal Reserve signals an early pivot puts further pressure on an economy in which developers play a major role.

“The key is how much exports and facilities investment can help shore up the economy this year as debt issues continue to weigh on construction,” said Chang Jae-chul, an independent economist who has previously worked at KB Kookmin Bank.

Fiscal spending is also likely to be influenced by the outcome of South Korea’s April elections as well as monetary policy, Chang said. The main opposition Democratic Party of Korea has called for extra budgets while Yoon has emphasized the importance of fiscal restraint after pandemic-era spending boosted national debt levels.

A win for Yoon would help lower political hurdles for him to reduce wealth taxes, take a tougher stance on North Korea and continue his emphasis on tightening relations with the US and Japan during the remainder of his tenure that ends in 2027.

Yoon also has drummed up support for a bigger semiconductor cluster in South Korea, in recognition of tech exports as a pillar of the nation’s future prosperity. Policymakers expect chip exports to rebound this year, boosting economic growth to above 2% and underpinning investment.

The US presidential vote in November also looms as a source of uncertainty for South Korea, whose chipmakers have large facilities in China that are subject to technology controls by Washington.

READ: The $9 Billion Chip Plant Stuck in Limbo of US-China Rivalry

Yoon has made stronger economic and technology ties with the US a centerpiece of his presidency since taking office in 2022. The US last month overtook China as South Korea’s largest export destination for the first time in two decades.

China still remains South Korea’s biggest trading partner and its economic slowdown particularly weighed on exports through last summer, while geopolitical tensions between Washington and Beijing cast a cloud over the semiconductor industry.

Consumption remains weak in China, and South Korean exports to the world’s second-largest economy eked out just 0.1% growth from a year earlier in the first 20 days of January, according to customs office data.

“We expect a modest rebound in exports to China this year,” Duncan Wrigley, an economist with Pantheon Economics, said in a note this week. “The upcycle in semiconductor shipments should continue, led by high-end chips for AI-related applications.”

The World Trade Organization has predicted that growth in global commerce will accelerate to 3.3% this year from 0.8% in 2023, while the World Bank projects a 2.3% gain in trade volume, versus 0.2% last year.

Meanwhile, South Korea’s private consumption eked out 0.2% growth in the fourth quarter, while government spending was up 0.4% last quarter compared with the previous three-month period. For 2023 as a whole, the economy expanded 1.4%, in line with an earlier BOK projection.

(Updates with details, economists’ comments)

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