Growth Stuck at 0.1% for Two Consecutive Quarters... Barely Avoided Recession

Korea's '2% Growth' Last Year Just Made It... 0.1% in Q4 Due to Martial Law Shock

Domestic Demand Weakness Deepens in Consumption and Investment

Possibility of Interest Rate Cut Increases This Month

The economy grew by only 0.1% in the fourth quarter of last year, bringing the annual growth rate to a mere 2.0%. Analysts attribute this 'growth shock' to a significant decline in consumer sentiment following the declaration of martial law last month, coupled with a sharp drop in construction investment.

According to the '2024 Q4 and Annual Real Gross Domestic Product (GDP)' report released by the Bank of Korea on the 23rd, GDP in the fourth quarter increased by 0.1% compared to the previous quarter. This marks a consecutive 0.1% growth rate following the third quarter. It is only one-fifth of the quarterly forecast of 0.5% projected by the Bank of Korea at the end of November last year. It is also lower than the '0.2% or slightly below' level recently disclosed on the Bank of Korea's blog.

The growth shock is analyzed to be due to the worsening domestic demand in consumption and investment following the martial law. Private consumption in the fourth quarter increased by only 0.2%, less than half of the initial forecast (0.5%). The decline in card spending since the end of last month compared to the previous year reflects the weak consumption post-martial law. Construction investment decreased by 3.2%. Although a decline in construction investment was expected, the extent was greater than anticipated. Shin Seung-chul, Director of Economic Statistics at the Bank of Korea, explained, "Political uncertainty significantly impacted the decline in growth rate."

As the fourth quarter growth rate plummeted, the annual growth rate also fell to 2.0%, 0.2 percentage points lower than the initial forecast. Although it slightly rebounded from 1.4% in 2023, it barely achieved the potential growth rate (2.0%). The Bank of Korea expects the low growth trend to continue this year. Consequently, there is speculation that the Monetary Policy Committee may lower the current base rate of 3.0% to 2.75% at the monetary policy direction meeting on the 25th of next month.

Last Year's Growth Rate Barely at 2.0%... Economic Sentiment Continues to Deteriorate

One-Fifth of the Forecast... Warning of 'Low Growth Entrenchment'

The 0.1% growth rate in the fourth quarter (compared to the previous quarter) is analyzed to be due to the rapid freezing of economic sentiment following the declaration of martial law last month. The adverse effects were particularly pronounced in domestic demand, including consumption and investment. Concerns are rising that this sluggish economic trend may continue this year if no economic stimulus measures are introduced.

○ Frozen Investment and Consumption

The Bank of Korea forecasted a 0.5% growth rate for the fourth quarter at the end of November last year. The growth rate announced on the 23rd was only 0.1%, one-fifth of the forecast. For two consecutive quarters, the '0.5% forecast' resulted in a '0.1% actual performance.'

The significant impact was due to the sharp contraction in private consumption. Private consumption, which increased by 0.5% in the third quarter of last year, only grew by 0.2% in the fourth quarter. This is less than half of the Bank of Korea's forecast (0.5%). The increase was centered on semi-durable goods such as clothing and footwear, and services like healthcare and education.

Shin Seung-chul, Director of Economic Statistics at the Bank of Korea, explained, "The expansion of political uncertainty has dampened economic sentiment, affecting private consumption," and "The growth in credit card spending has also declined." Specifically, he pointed out the disappearance of the effects of new product launches in mobile phones and cars in the third quarter, and the decrease in winter heating demand due to warm weather.

Construction investment plummeted by 3.2%. Both building construction and civil engineering construction decreased due to economic deterioration. Director Shin stated, "The government's strengthening of macroprudential regulations, slowdown in housing sales, and rising labor and construction costs are the causes of the investment decline," and "The psychological deterioration due to martial law also affected sales performance."

Government consumption increased by 0.5%, centered on health insurance benefits. Facility investment increased by 1.6%, mainly in semiconductor manufacturing equipment. Exports increased by 0.3%, while imports decreased by 0.1%.

Domestic demand contributed to growth through consumption expenditure (0.2 percentage points), but total fixed capital formation in facilities and construction (-0.3 percentage points) significantly decreased, failing to contribute to overall growth. The net export contribution turned positive at 0.1 percentage points, from -0.8 percentage points in the previous quarter.

The annual growth rate was recorded at 2.0%. As the fourth quarter growth rate fell significantly short of expectations, the annual growth rate was also 0.2 percentage points lower than the forecast of 2.2% at the end of November last year. However, this is a high level compared to major countries except the United States (2.8%). Net exports contributed 1.8 percentage points to the annual growth rate, accounting for 90% of the total growth rate (2.0%). The contribution of domestic demand was only 0.2 percentage points.

○ Concerns of Low Growth Entrenchment

With the fourth quarter growth rate at 0.1%, concerns are rising that the low growth trend will become entrenched following the second quarter's -0.2% and the third quarter's 0.1%. Although it is not yet at the level of a technical recession (two consecutive quarters of negative growth), the rapid cooling of sentiment among economic agents such as households and businesses is cited as an unstable factor.

Director Shin stated, "The psychological contraction due to political uncertainty and construction sluggishness will continue to have an impact," and "The growth rate for the first quarter of this year may also come out lower than the initial forecast of 0.5%." He added, "It is necessary to swiftly execute the budget and visualize the timing of the supplementary budget."

Consumer and business sentiment remains poor. The all-industry business sentiment index (CBSI) announced by the Bank of Korea on this day was recorded at 85.9, down 1.4 points from the previous month. It is the lowest level since the COVID-19 pandemic. The consumer sentiment index (CCSI) was 91.2, falling below the long-term average (100) for two consecutive months.

However, the government maintains that a rebound in the first quarter growth rate is possible. Lee Seung-han, Director of Comprehensive Policy at the Ministry of Strategy and Finance, stated, "The rapid execution of the budget, completion of construction investment, and the possibility of easing political uncertainty are positive factors," and "There are reasons for the first quarter growth rate to be better than the fourth quarter of last year."

Kang Jin-kyu/Park Sang-yong Reporter josep@hankyung.com