(Bloomberg) — South Korea’s economic growth held steady last quarter as exports maintained momentum, but lingering credit risks cloud the outlook ahead of parliamentary elections crucial to President Yoon Suk Yeol’s policy initiatives.
Gross domestic product grew 0.6% in the three months through December from the previous quarter, the Bank of Korea said Thursday. That figure matched economists’ forecast of a 0.6% expansion. From a year earlier, the economy expanded by 2.2%.
For 2023 as a whole, the economy expanded 1.4%, in line with an earlier BOK projection.
South Korea’s economy serves as an leading indicator of the health of the world economy as it depends heavily on international trade. Its performance is closely tied to major economies, in particular, its key trading partners China and the US.
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.
Yoon’s ruling party is seeking to retake a majority through elections in April. A win would help lower political hurdles for Yoon 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.
If and when growth does pick up, the BOK will be wary of the potential for inflation to flare up. For now the bank is poised to keep its benchmark interest rate at 3.5%, which it characterizes as restrictive. The BOK has kept the policy rate at that level for a full year.
Higher rates have put a strain on Korea’s credit markets, and a debt crisis has engulfed local developer Taeyoung E&C since late last year. Developers play a major role in the economy, and a property market slump adds to concerns for the government.
The construction industry took the biggest hit last quarter in GDP, shrinking 4.2% from the previous three-month period and marking its biggest drop since the first quarter of 2012.
Meanwhile, private consumption eked out 0.2% growth, while government spending was up 0.4%. Meanwhile, South Korea’s exports in real terms increased 2.6%, as facilities investment advanced 3%.
An economic slowdown in China particularly weighed on Korea’s exports through last summer, while geopolitical tensions between Washington and Beijing cast a cloud over the semiconductor industry. South Korea has large chipmaking facilities in China, with the companies running them subject to technology controls by the US.
Consumption remains weak in China in another headwind for Korea. Exports to the world’s second-largest economy eked out just 0.1% growth from a year 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.
