Economy expands, driven by consumption and exports; fiscal injection has limitations
The South Korean economy expanded 1.2 percent in the third quarter from the previous quarter, driven by rising consumption and solid exports.
The figure exceeds the 1.1 percent growth anticipated by the Bank of Korea in August and is also the fastest in a year and a half.
Growth had lingered around zero percent for four straight quarters after the 1.2 percent posted in the first quarter of 2024. There was great concern that the economy could end up this year at around zero percent.
However, the higher-than-expected third-quarter figure was a green light for Korea's economic outlook. Government officials said that the economy appears to be making a typical turn toward recovery. They are cautiously optimistic about annual growth reaching the one percent range.
At the center of the third-quarter "surprise" growth was domestic demand. Private consumption increased 1.3 percent, which is the highest rate since the third quarter of 2022.
Most analysts said consumer sentiment improved largely thanks to 13.7 trillion won ($9.55 billion) worth of consumption coupons the government distributed to almost everyone. The government increased its spending by 1.2 percent.
Despite concerns about mounting trade protectionism, exports managed to remain on an upswing, recording a 1.5 percent increase. Faced with high US tariffs, automakers targeted Europe and the Middle East as alternative markets and achieved good results.
However, downsides should not be underestimated. Construction investment shrank 0.1 percent for six straight quarters, incurring massive job cuts. According to the Ministry of Data and Statistics on Tuesday, employment decreased markedly in those industries heavily influenced by domestic demand, such as construction and retail. The building construction sector lost 69,000 jobs in the first half, and 4,000 jobs vanished from the dining and retail industries.
The business outlook has long been stagnant. The Business Survey Index for November, compiled by the Federation of Korean Industries from the 600 largest Korean companies, stood at 94.8, again falling short of the baseline of 100. Companies have had a negative business outlook for three years and eight months now.
In terms of several positive indicators, the Korean economy appears to have improved, but it could be a matter of time before the bubble bursts.
The effect of consumption coupons, which played a big role in the third-quarter growth, is slowly receding. Coupons were distributed twice — 9.2 trillion won in July and 4.5 trillion in September. The effect of the September payments will be reflected in the fourth quarter.
The government can hardly afford to give away additional coupons. It compiled a 13.8 trillion won revised supplementary budget in May and another 31.8 trillion won extra budget in July. This spending increase pushed the managed fiscal balance into a deficit of 88 trillion won — the second largest on record — in late August.
The thing to do now is to keep private demand alive even after the effect of coupons disappears. However, conditions are not so favorable. Consumer sentiment is suppressed by the high cost of living. Grocery prices and restaurant expenses are already high and rising steadily. Household debt shows little sign of abating. Indebted households and small business owners want interest rates to come down, but financial authorities fear that low interest rates might cause a surge in housing prices. Housing policies have lost consistency and vacillate depending on public backlash. Elaborate measures to revive demand are needed.
Cash stimulus, like consumption coupons, is no more than a quick fix. Now is the time to double down on structural reforms and productivity. This is a standard path. Constraints on corporate activities, such as the rigid workweek and excessive labor rights, must be eased. Stagnant industries must be restructured and emerging fields supported.
When companies regain their vigor, jobs and incomes can increase, and consumption and investment can interact with each other in a virtuous cycle. Dependence on fiscal injections alone has limitations in sustaining growth.
khnews@heraldcorp.com
