In recent months, South Korea has witnessed a remarkable economic turnaround, thanks to the combined resumption of exports and domestic demandThe country's GDP saw a quarter-on-quarter increase of 1.3%, prompting the Ministry of Economy and Finance to suggest that annual growth might surpass earlier government predictions of 2.2% and the Bank of Korea’s estimate of 2.1%. Notably, the first quarter brought a year-on-year GDP growth of 3.4%, significantly higher than the historical potential growth rate of around 2%.

This significant upturn in South Korea’s economic performance marks the highest growth rate since the fourth quarter of 2021, following a significant dip in the previous yearsAfter witnessing a concerning drop to just 0.7% in the first quarter of 2022 and further subpar figures in subsequent quarters, the economy managed to find its footing with encouraging numbers in the first quarter of this year

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It is interesting to note that during the last quarter of 2022, South Korea even faced a contraction of 0.3%.

The resurgence of South Korea’s economy in early 2023 can largely be attributed to a favorable export climate and recovering domestic demandSince October of last year, the export sector has begun to regain strength, driven predominantly by the semiconductor industry, which displayed growth of 0.9% compared to the past quarterFurthermore, net exports—exports minus imports—accounted for a significant contribution of 0.6 percentage points to the GDP growth rate of 1.3%, highlighting the critical role this sector plays in the broader economy.

What sets the first quarter’s recovery apart from past trends is the newfound strength of domestic demand, which has emerged as a crucial driver of economic growthConsumer spending, encompassing various sectors like clothing, dining, and accommodation, increased, with private consumption showing a quarter-on-quarter rise of 0.8%. Additionally, construction investments also demonstrated strength, growing by 2.7% over the same period, boosted by favorable weather conditions and high operational rates in construction projects

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All in all, domestic demand contributed approximately 0.7 percentage points to overall GDP growthThe Deputy Prime Minister and Minister of Economy and Finance, Choi Sang-mok, remarked on the balanced recovery of the economy, fueled by the improvements in exports alongside rebounding consumption and construction investments.

Examining specific industries, it becomes clear that the semiconductor and automotive sectors have provided core support to South Korea’s economic growthSamsung Electronics, a key player in the former sector, reported a staggering operating profit of 6.6 trillion won in the first quarter—an increase of over nine times compared to the same period last yearMeanwhile, SK Hynix marked a significant accomplishment, reporting sales of 12.4 trillion won, the highest ever for a first quarter, with an operating profit of 2.9 trillion won, indicating a return beyond the 2 trillion won threshold after seven quarters

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The automobile manufacturer Hyundai Motor also demonstrated robust performance, achieving sales of 40.7 trillion won, establishing a new record for first-quarter sales, and boasting a profit margin of 8.7%, which outpaced Tesla’s profit margin of 5.5% during the same period.

The past year posed various challenges, such as shifts in global supply chains and regional conflicts, which had caused the semiconductor sector's exports to fall by 24% year-on-yearDuring this period, the automotive industry bore the responsibility of sustaining South Korea's overall export performanceHowever, signs of improvement are visible this year, as while the automotive industry maintains steady performance, the semiconductor industry shows signs of a full recoveryAnalysts suggest that combined, these two sectors account for roughly 30% of South Korea's exports, and positive trends in both should foster a virtuous cycle of investment, employment, and consumption, thereby driving the economy toward a sustained recovery.

International financial institutions have taken note of this optimistic picture, with major investment banks like JPMorgan, UBS, Citigroup, and HSBC recently raising their growth rate forecasts for the South Korean economy

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For instance, JPMorgan has raised its forecast from 2.3% to 2.8%, while UBS updated its predictions from 2.0% to 2.3%. Citigroup also increased its estimate from 2.0% to 2.2%, and HSBC made a relatively modest adjustment from 1.9% to 2.0%. Analysts at these financial institutions have emphasized that South Korea's underlying growth drivers appear more robust than previously anticipated, spurred by a steady growth in the U.Seconomy and a rapid recovery in China that should provide external support for Korean exports.

<pMoreover, various international organizations have posted growth forecasts for South Korea that exceed those of both the government and the central bankThe ASEAN+3 Macroeconomic Research Office (AMRO), for instance, predicts a growth rate of 2.3% for the country this year, with the International Monetary Fund (IMF) aligning its prediction at the same levelThe Organization for Economic Cooperation and Development (OECD) is slightly less optimistic, estimating the growth rate at 2.2%.<pHowever, a disconnect persists between the aggregate economic growth figures and the on-the-ground experiences of ordinary South Koreans