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South Korea's GDP grew by 0.7% quarter-on-quarter (q/q) in the
second quarter of 2021, following an increase of 1.7% q/q in the
first quarter of 2021. GDP rose by 5.9% year-on-year (y/y) in the
second quarter of 2021, compared with growth of 1.9% y/y in the
first quarter of 2021.
Continued economic expansion in the second quarter of 2021 was
underpinned by strong consumption expenditure growth. Private
consumption expanded by 3.5% q/q, compared with growth of 1.2% q/q
in the first quarter of 2021. Government consumption spending also
strengthened, rising by 3.9% q/q in the second quarter of 2021,
compared with growth of 1.6% q/q in the first quarter of 2021.
Overall, final consumption expenditure rose by 3.6% q/q in the
second quarter, strengthening compared with growth of 1.3% q/q in
the first quarter.
Compared to a year ago, final consumption expenditure rose by
4.1% y/y in the second quarter, improving on the 1.5% y/y growth
rate in the first quarter. In 2020, final consumption had been in a
protracted slump, having recorded four consecutive quarters of
negative year-on-year growth. The Ministry of Trade, Industry and
Energy released data showing that South Korea's overall retail
sales saw year-on-year growth of 11.4 percent in June.
Manufacturing output grew by 13.7% y/y in the second quarter of
2021, reflecting increasing output of autos, electronic, optical
and chemical products, with strengthening business conditions. Auto
production rose by 11.5% y/y during the first six months of
2021.
The seasonally adjusted IHS Markit South Korea Manufacturing
Purchasing Managers' Index (PMI) edged up to 53.9 in June from 53.7
in May, indicating a further improvement in the health of the
manufacturing sector and extending the current sequence of
expansionary conditions to nine months.
A key driver for the rapid expansion in manufacturing output in
the first half of 2021 has been the rebound in exports. Stronger
economic growth in major economies such as the US, China, EU and UK
linked to the rollout of vaccination programs during the first half
of 2021 helped to boost South Korean new export orders from its key
export markets. South Korean exports rose by 39.7% y/y in June
2021, buoyed by strong growth in exports of electronics and autos.
South Korean auto exports rose by 50% y/y in value terms during the
first six months of 2021. Ministry of Trade, Industry and Energy
data showed that Korea's exports in the first half of 2021
increased 26% y/y, hitting a record-high value of USD 303
billion.
In the latest IHS Markit South Korea Manufacturing PMI Survey,
manufacturers pointed to a further acceleration in input cost
inflation during June. Input price pressures intensified in the
latest survey period and were the steepest on record as businesses
widely reported sharp rises in the cost of raw materials amid acute
shortages. At the same time, South Korean goods producers sought to
pass these costs on to clients, resulting in the strongest rise in
output prices since the survey began in April 2004.
The Bank of Korea indicated in its Monetary Policy Decision in
July 2021 that consumer price inflation will continue to run in the
lower- to mid-2% range for some time. Core inflation is forecast to
increase gradually to the mid-1% range. The Monetary Policy Board
of the Bank of Korea has signalled that it will maintain an
accommodative stance of monetary policy as there remain
uncertainties posed by the COVID-19 virus. However, the Korean
economy is expected by the BOK to continue its recovery and
inflation to remain at a high level for some time. While
maintaining accommodative monetary policy in the near-term, the
Monetary Policy Board have indicated that they will continue to
assess whether it is appropriate to adjust the degree of
accommodation.
Electronics sector exports rebound
The electronics manufacturing industry is an important part of
the manufacturing export sector for South Korea which is a major
global exporter of electronics products to key markets such as the
US, China and EU. As Vietnam is an important production hub for
South Korean electronics multinationals such as Samsung and LG for
a wide range of electronics products such as mobile phones, Vietnam
is a key export market for South Korean electronics components.
The strong rebound in world consumer markets, notably in the US,
China and Western Europe, are continuing to drive growth in demand
for electronics. This is resulting in buoyant growth in household
spending on electronics products as well as products that are
intensive users of electronics, notably autos.
The headline seasonally adjusted IHS Markit Global Electronics
PMI registered 60.7 in June, continuing to show strong operating
conditions, albeit edging down from 61.2 in May. Sharp growth was
once again seen across output and new orders, driving another
strong rise in employment.
The IHS Markit Global Electronics PMI new orders index meanwhile
showed the rate at which demand improved during June was strong,
despite easing slightly from the 17-year high recorded in the
previous month.
The South Korean Ministry of Trade, Industry and Energy has
released statistics showing that outbound shipments of Korea's
information and communications technology (ICT) goods showed strong
growth in the first half of 2021 and increased by 29% y/y in June.
South Korean semiconductor exports rose by 34% y/y, with exports of
memory chips up 31% while exports of system chips rose by 47% y/y.
Exports of displays rose by 30% y/y. Exports of computers were up
9.4% y/y while exports of peripheral devices were 19.5% higher.
The strength of South Korean ICT exports in the first half of
2021 has been boosted by rapid growth in exports to the world's
largest consumer markets. In June, electronics exports to the US
were up 32% y/y, while exports to the EU were up 51% y/y.
Electronics exports to China rose by 28% y/y.
ICT exports to Vietnam, which is a key manufacturing hub for
South Korean electronics firms, also showed rapid growth of 25% y/y
in June, reflecting large exports of intermediate electronics parts
and components for final assembly in Vietnam. However, the severe
escalation in the new COVID-19 wave in Vietnam during July poses a
near-term risk to South Korean exports to Vietnam as well as to the
South Korean manufacturing supply chain if Vietnamese industrial
production suffers significant disruptions due to the escalating
domestic pandemic.
Samsung Electronics stated on 29th July that in Vietnam, there
were production disruptions to their operations in certain places
due to lockdowns that affected their production. However, the firm
managed to minimize the impact by shifting production to other
countries in their global supply chain. Samsung Electronics has
large-scale manufacturing production operations in Vietnam.
South Korean economic outlook
The near-term outlook for the South Korean economy is for GDP
growth to recover to a pace of around 3.8% y/y in 2021, with
continued firm expansion at a pace of around 3.0% in 2022. The
economic recovery in the first half of 2021 has been driven by
consumption growth and merchandise exports. The Bank of Korea has
forecast GDP growth in 2021 at around 4%. The South Korean Ministry
of Economy and Finance raised its GDP growth forecast for 2021 from
3.2% y/y to 4.2% y/y in June 2021.
However, despite the strong rebound of consumption during the
first half of 2021, the escalating COVID-19 wave during July has
created downside risks to the near-term outlook.
South Korea commenced its COVID-19 vaccination program in late
February, with the government aiming to have 25% of the population
vaccinated by June 2021. By July 27th, around 35% of the total
population had received first dose vaccinations, with 13.6% of the
population having received both doses. However, so long as a large
share of the population remain unvaccinated against COVID-19, the
economy faces continued vulnerability to an escalating wave of
COVID-19 cases. The downside risks have intensified particularly
due to the increased transmissibility of new strains of the
COVID-19 virus that have impacted upon other countries worldwide,
including a number of Asian nations.
An additional challenge is that the recovery of South Korean
trade in services is expected to be delayed and protracted, as
international travel restrictions in the Asia-Pacific region
continuing to constrain any early recovery in exports of tourism
and commercial aviation, which are an important component of total
services exports.
Once vaccination rates reach a high share of the total
population, this is expected to support normalization of domestic
economic activity, based on the experience of North America and
Western Europe.
Over the medium-term outlook, South Korean exports are expected
to grow at a rapid pace, helped by the sustained strong growth of
intra-regional trade within APAC, as China, India and ASEAN
continue to be among the world's fastest-growing emerging markets.
South Korea's strong competitive advantage in exporting key
electronics products, notably semiconductors and displays, are
expected to be an important positive factor underpinning export
growth.
The rapid growth of South Korean exports is also expected to be
strengthened by the regional trade liberalization architecture.
This includes the large recent RCEP multilateral trade agreement
and major bilateral FTAs. South Korea is also actively evaluating
the possibility of applying to join the Comprehensive and
Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade
agreement and has begun unofficial bilateral talks with the CPTPP
member nations to prepare for its potential formal membership
application.
Rajiv Biswas, Asia Pacific Chief Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
