No Increase in Income Despite Economic Growth

Third quarter (July to September) 2005 statistics reveal a year-on-year increase of 4.4 percent in real gross domestic product (GDP), showing the speed of an economic recovery has accelerated slightly.

As worsening trade conditions have led to hefty deficits in trade, however, income levels have stayed put despite the economic growth. Consumer sentiment still remains negative as a result.

According to the “Third Quarter Real GDP Report” released by the Bank of Korea on October 25, the economy grew 4.4 percent in the quarter compared to last year thanks to increases in private spending and exports.

Four percent year-on-year growth is the highest since the third quarter of 2004, which saw 4.7 percent growth. In particular, the increase in quarter-on-quarter growth, 1.8 percent, was the highest since the 2.8 percent in the fourth quarter of 2003.

Quarter-on-quarter growth rates have grown steadily from 0.4 percent in the first quarter to 1.2 percent in the second, and then to 1.8 percent in the third quarter. This suggests that the economy is on track to recovery.

Consumption in the private sector acted as the driving force behind the economic growth, with a year-on-year jump of 4.0 percent, the highest rate since the final quarter of 2002. Spending is up for durable goods such as large-sized TVs, computers, and passenger vehicles, and in service industries such as medical care, telecommunications, culture, and entertainment.

Product exports have also recorded two-digit growth for the first time this year, around 13.5 percent. The rate of increased capital expenditure at 4.2 percent was also the highest in a year.

Kim Byung-hwa, the director general of economic statistics for the Bank of Korea, predicted that “as private consumption and exports have held strong, the economy will probably grow 4.5 percent in the second half and 3.8 percent for the whole year, as was projected at the beginning.”

However, as real trade deficits in the third quarter arising from a worsened trade environment amount to 12.6 trillion won, a record figure for a single quarter, gross domestic income (GDI) has climbed only a modest 0.2 percent from the previous year. This is the smallest growth since the fourth quarter of 2000, which scored a mere 0.2 percent growth.

Such dismal income growth means that despite signs of economic recovery, consumer sentiment has not picked up as readily.

Bank of Korea governor Park Seung also recently voiced the opinion that “although we can expect an economic recovery in the second half similar to the potential growth rate, the recovery will not be felt by the public since the income growth rate remains low.”

Managing director Chung Moon-kun of the Samsung Economic Research Institute (SERI) predicted that “surging international oil prices and the declining price of semiconductors, the two major factors that are making the trade environment more difficult, are unlikely to change for the better in the short term, meaning income levels will continue to stay put despite the economic rebound.”

Kyung-Joon Chung news91@donga.com