South Korea slows as pent-up demand exhausts

October 25, 2021

SEOUL -- South Korea's recovery slowed in the third quarter after an impressive surge in Q2. Sequentially, headline GDP growth came in at 0.3% q/q,translating into an annual rise of 4%. In a briefing note, ANZ Bank says the slowdown arose mainly from a quarterly dip in private consumption and investment. Exports, meanwhile, strengthened, allaying some concerns over supply side shortages in key industries such as electronics and autos.

ANZ says the data, particularly on private consumption, does suggest that pent-up demand has now been more or less exhausted.

"Still, we do not expect (demand) to severely retreat for two reasons:

(1) The planned broader re-opening of the economy from next month should stimulate both jobs and wages, and (2) a supportive fiscal policy is here to stay.

"In fact, the supplementary budget, worth 1.7% of GDP, will continue to work its way through the economy in Q4, while the proposed 2022 budget has pencilled in spending equivalent to 28.3% of GDP, which is considerably higher than pre-pandemic levels.

What's more, tax revenues have been running ahead of target, which potentially opens up scope for

more fiscal support to shore up economic activity if needed. For now, the Government intends to retire public debt with excess revenues.

ANZ says the external environment has also turned more uncertain amid growing concerns about a sharper slowdown in mainland China as well as disruptions to global supply chains

"There are also signs of the memory chip cycle topping out, with inventories inching up and prices softening. These headwinds, however, amount to slower growth in exports and not a tumble. In fact, exports have started Q4 on a strong note, rising 36.1% y/y in the first 20 days of October.

"Overall, growth remains on track to achieving the BoK's 4% projection in 2021, and we still expect

another rate hike to materialise in November. Some moderation in growth is to be expected in 2022, amid less favourable base effects and the lagged impact of a gradual withdrawal in monetary policy."  (ATI).