(Bloomberg) — South Korea’s economic recovery showed its resilience in the face of interest rate hikes as it expanded at a faster pace supported by firm export demand and a pickup in consumption before the emergence of omicron.
Gross domestic product grew 1.1% in the October-to-December period from the prior three months, data from the Bank of Korea showed Tuesday. That was in line with economists forecasts.
The acceleration supports the central bank’s view that the overall economy is maintaining sufficient momentum as the Bank of Korea moves away from its emergency stimulus settings.
From a year earlier, the economy expanded 4.1% in the fourth quarter, while annual growth in 2021 rose 4%, matching the BOK’s earlier forecast for the biggest gain since 2010.
The bank has increased its benchmark rate three times since initiating a tightening cycle in August, and signaled it could hike borrowing costs further as inflation becomes a major concern.
Still, the next rate increase may come later in the year as the reintroduction of restrictions on activity following an omicron-fueled surge in infections is likely to weigh on consumption this quarter.
The central bank may also want to avoid taking action close to a presidential election in early March.
“The GDP figures were generally in line with expectations and therefore aren’t likely to affect the central bank’s recent hawkish stance,” said Lim Hyeyoun, an economist at Hanwha Investment & Securities Co. Lim expects the BOK to move again in the fourth quarter of this year.
Read more: Bank of Korea Flags More Rate Hikes to Come Over Inflation Fears
Exports have been the economy’s mainstay in recent quarters, with the nation’s shipments hitting a record value last year as global trade recovered from the pandemic and tech demand continued to soar. The data showed exports kept growing in the fourth quarter, expanding at a faster pace of 4.3%.
Private consumption also picked up, growing 1.7% in the last quarter as earlier restrictions were lifted and some pent-up domestic demand was released before omicron and a record surge of infections prompted renewed curbs on activity.
Government spending was up 1.1%, while construction investment grew 2.9% for the first gain in three quarters.
The government has since extended the tighter curbs twice in January, while easing the limit on private gatherings.
The renewed virus outbreak didn’t stop the central bank from raising the rate in its latest policy meeting earlier this month, but it has created fresh uncertainty over the outlook for the economy.
The government last week unveiled plans for a 14 trillion won extra budget to help smaller businesses get through the latest virus wave. Both the main candidates in the presidential election have called for even more spending support to shore up the recovery in light of renewed restrictions.
What Bloomberg Economics Says…
“Looking to the current quarter, we think growth may still hold up despite pandemic-related pressures. High-frequency indicators point to softer but resilient domestic activity. Stable demand for high-tech and intermediate goods should continue to support exports.”
— Justin Jimenez, economist
For the full report, click here
The BOK’s next policy meeting in February will be Governor Lee Ju-Yeol’s last. Lee has said a benchmark rate at 1.5%, a quarter percentage point above its current level, shouldn’t be considered policy tightening, an indication that he sees scope for another hike.
Still, many economists see the central bank waiting before it raises rates again as it monitors developments in the economy following its earlier policy moves.
The bank will also want to keep a close eye on the trajectory of the virus, the outcome of the election and the aggressiveness of the Federal Reserve in tightening U.S. policy.
“We assume that the impact of Omicron will be relatively brief and mild, helped by the fact that over 50% of the population have already received a booster shot,” said Alex Holmes at Capital Economics in a note. “With the economic outlook still upbeat, the Bank of Korea is set to continue tightening over the quarters ahead.”
(Adds economist comments)
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
