South Korea's real gross domestic product expanded 1.8 percent quarter-on-quarter in the first quarter of this year, coming in 0.1 percentage point above the preliminary estimate released two months ago. The upward revision provides grounds for the Bank of Korea's annual growth rate outlook of 2.6 percent to be raised to at least 2.7 percent. Nominal GDP — which captures rising export prices including semiconductor unit prices — grew 10.5 percent quarter-on-quarter, the fastest pace in 50 years since the first quarter of 1976, when petrodollars poured in during the Middle East construction boom. Some analysts now project that annual nominal GDP growth could exceed 10 percent this year. Recording double-digit nominal growth — a feat last seen during the high-speed expansion of the 20th century — is a genuine source of national pride.
Yet for the warmth of double-digit nominal growth to reach ordinary households, South Korea must clear three stubborn hurdles: a high exchange rate, high inflation and high interest rates. Last year's per capita gross national income stood at $36,963, keeping the country in the $30,000 range for the 12th consecutive year and falling behind Taiwan and Japan once again. In won terms, GNI per capita rose 4.6 percent to 52.57 million won (about $34,600) from 50.27 million won the year before, but a sharp weakening of the won against the dollar meant the dollar-denominated figure grew just 0.3 percent. The weak won has deepened further this year, with a rate above 1,500 won per dollar hardening into a new normal. Dollars flowing out through stock markets and other overseas channels are now outpacing the dollars earned through semiconductor and other trade exports.
A sustained export boom led by semiconductors means South Korea's per capita GNI could approach $40,000 this year, potentially ahead of the previously expected timeline of 2028. The direction of the won-dollar exchange rate will be the deciding factor. Taiwan, whose currency has been more stable, already crossed the $40,000 threshold last year. Failure to rein in the high exchange rate risks widening the gap with Taiwan, which has set its growth rate outlook at 9.64 percent this year.
Also worth noting is that real household gross disposable income — adjusted for inflation — grew just 0.3 percent quarter-on-quarter, suggesting that export earnings are not translating into household income or domestic consumption. Because the semiconductor industry generates fewer jobs than traditional manufacturing, the economic gains have yet to be felt on the ground. Adding to the pressure, consumer prices rose 3.1 percent in May, the highest reading in 26 months. If South Korea cannot navigate the wave of high inflation driven by elevated oil prices stemming from the war in the Middle East, the significance of double-digit nominal growth will inevitably be diluted.
A high exchange rate pushes up import prices, fuels inflation and drives up interest rates — all of which erode living standards, overseas purchasing power and new investment. The task now is to manage these three pressures effectively so that strong nominal growth translates into real gains for the people.
