S. Korea’s GDP contracted by 0.2% in Q2

South Korea’s gross domestic product (GDP) contracted in the second quarter of this year with decreasing domestic demand and a slowdown in exports. The last time the GDP experienced negative growth compared to the previous quarter was the fourth quarter of 2022, with a negative growth of 0.5 percent due to the lingering effects of COVID-19. Minister of Economy and Finance Choi Sang-mok said in late April that 1.3 percent GDP growth in the first quarter was a textbook growth path, which was not led by the government’s fiscal efforts but driven by the private sector, export growth and domestic demand expansion. Three months later, however, the country is faced with a completely different situation.

On Thursday, the Bank of Korea announced that South Korea’s real GDP in the second quarter decreased by 0.2 percent compared to the previous quarter. It was the result of a 0.2 percent decrease in private consumption, especially consumer goods such as cars and clothes, a 1.1 percent decrease in construction investment due to construction cost increase, and a 2.1 percent decrease in facility investment such as semiconductor equipment. While the exports of semiconductors, cars, and petroleum products increased, imports increased even more due to increases in oil prices, resulting in negative growth. With a higher KRW-USD exchange rate, the real gross national income (GNI) decreased by 1.3 percent compared to the previous quarter.

The depressing economic performance in the second quarter is far from Minister Choi’s comments of “a balanced recovery” and “a clear green light.” In addition, the growth rate in the first half of the year stood only at 2.8 percent, which is lower than the Bank of Korea’s prediction in May. While the central bank and the government explain a negative growth in the second quarter as a base effect of high growth in the first quarter, they are criticized for lacking a sense of crisis and overly optimistic about the current economic situation.

The second half of the year doesn’t look bright either. The domestic demand will remain contracted for a while as people have less disposable income due to high inflation and interest rates. The composite business sentiment index, which represents how companies in South Korea feel about economic situations, dropped to 95.1 points in July, the lowest in the last five months. An index below 100 means companies are negative about future economic situations. Consumer prices are destabilizing as the prices of vegetables have increased due to unusual weather, and a reduction in oil tax has decreased starting this month.

The recent contraction of the economy confirm‎s that the high growth experienced by South Korea earlier this year was a temporary event resulting from the global semiconductor industry, which had remained contracted for a long time, beginning a super cycle. If the government fails to recognize the ‘semiconductor illusion’ and misjudges the reality, the economic recovery that people can feel will become even more distant.