South Korean Economy Gains Headway in First Quarter

According to the Bank of South Korea, the economy grew 0.8 percent in the first quarter, an uptick from 0.3 percent in the last quarter. The economy gained traction due to an increase in consumer spending and the construction sector.

According to the Bank of South Korea, the economy grew 0.8 percent in the first quarter, an uptick from 0.3 percent in the last quarter. The economy gained traction due to an increase in consumer spending and the construction sector.

The South Korean economy expanded 2.4 percent in 2014, falling below 2.7 percent from the fourth quarter. The slowdown marks a five-year low from an average of 3.8 percent. South Korea’s central bank predicts 3.1 percent growth for 2015. Overall, officials expected faster growth, but they are taking measures to increase expansion. For instance, the central bank lowered interest rates to boost consumption. President Park Geun Hye’s administration tries to tackle the nation’s extensive household debt crisis through a program, which does not receive enough funding, that would have restructured loans for borrowers and lowered credit card activity. Household debt stands at $489 billion, which is more than the nation’s GDP.

Exports Decline

South Korea’s export market is not producing enough to fuel the economy, stemming from reduced demand from other nations. Exports dropped on a consistent monthly basis in 2015. Central bank governor Lee Ju Yeo admitted that the future of the export market remains uncertain due to slower than expected growth in China and a stronger Korean won.

South Korean Housing Market

Officials are concerned that low interest rates will cause deflation in the housing market. The government also eased mortgage and developer restrictions, but this strategy only added to the nation’s skyrocketing debt. However, the construction sector made a huge improvement in the first quarter because of home construction, expanding 7.5 percent as opposed to a 7.8 contraction from the previous quarter.

The Need for More Stimuli

The economy may be gaining speed, but some experts call for a stimulus package to create extra growth. However, South Korea already delivered a $40 billion stimulus package in conjunction with interest rate cuts. Leaders feel pressured to implement another stimulus program, but another major problem is consumer confidence. Consumption may continue to stagnate as more people lose hope in a genuine recovery, and the nation’s household debt reduces domestic spending.

Conflicting Strategies

Lee expects the economy to make a gradual recovery due to low oil prices and reduced interest rates. He proposes implementing structural reforms, such as increasing wages, while tackling consumer-spending power. Government leaders have a different idea, focusing on interest rates instead. The central bank already reduced rates to a record 1.75 percent, with a 25-point drop in March. However, both sides are correct, and officials in both camps need to combine ideas to improve the economy and present a unified front.