South Korea’s first-quarter GDP fell -0.3% since the last quarter, largely due to reduced government spending, but also because of sluggish capital investment and exports.

The Bank of Korea announced the decline on Thursday – a fall of -0.3% from the previous quarter – the worst quarter-on-quarter figure since 2008. However, GDP grew 1.8% from the same period last year.

Overall GDP growth for 2019 was expected to be 2.5% – a figure that was downgraded from 2.6% earlier this month by the central bank.

State spending contraction

Although the result was unexpected, alarm bells are not ringing. Growth is expected to rebound in the second quarter as state contributions rise, including from a supplementary budget which is pending at the National Assembly.

GDP shrank in the first quarter of this year largely because state investments fell dramatically, dragging down the overall GDP growth rate by -0.7%. In previous first quarters, government outlays usually increase, suggesting that if state contributions had remained at a normal level, Q1 GDP would have registered static, rather than minus, growth.

A senior official at the Ministry of Strategy and Finance told Asia Times: “First-quarter GDP decline is a temporary phenomenon due to a sharp drop in contributions from the government sector … it will not continue.”

The government announced an expansionary budget for this year, but the execution was poor, especially in SOC investment for public use facilities in the sports and recreation sectors. This year, Seoul plans to spend 8.6 trillion won (US$7.3 billion) on SOC projects.

“The early execution of the budget at the central-government level was good … but local government’s execution was not good,” another official at the ministry said. “The actual execution of SOC in January and February was particularly sluggish.”

The Ministry of Finance expects a rebound of 1% in the second quarter, given the base effect of negative growth in the first quarter and a booster effect from full-fledged fiscal execution.

Grim export and capex figures

But despite that rosy forecast, external factors are also problematic. South Korea is suffering collateral impact from the China-US tariff war, and falling semiconductor prices, which are now in a cyclical downturn.

It is unclear if or when the trade war between South Korea’s two largest trade partners will be resolved, while chip prices are expected to remain low into the second half.

Exports were down 2.6% in the first quarter, led by electronic components, such as semiconductors and LCDs. Imports and facility investments also declined due to the semiconductor downturn.

Imports fell 3.3% on a decline in imports of energy goods, including crude oil and natural gas, and machinery and equipment.

Facility investment plunged a whopping 10.8% as imports of machinery and transportation equipment, including equipment for semiconductor manufacturing, both declined.

A ministry official predicted that exports and investment will not recover quickly.

“Exports are expected to be in better shape in April than March, but will likely continue to struggle in the first half,” he said. “It is uncertain whether the semiconductor industry will see a gradual recovery in demand, as expected by the market. But, rising oil prices will help petrochemical export growth.”