At the end of 2022, the Korean economy contracted for the first time since spring 2020.

Real gross domestic product fell 0.4 percent from the previous quarter, the South Korean central bank said in a first estimate of economic growth.

The main reasons were that the surge in consumption slowed down after the end of the pandemic and world trade was no longer running smoothly.

Like few other countries, South Korea is economically dependent on foreign trade and is considered an indicator of the state of the global economy.

Patrick Welter

Correspondent for business and politics in Japan based in Tokyo.

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For the past year as a whole, the Bank of Korea calculated growth of 2.6 percent, after 4.1 percent in the previous year.

For this year, the central bank expects a further weakening to less than 1.7 percent.

That would be the worst result since 2009. Analysts and economists forecast an average of 1.3 percent.

In a first reaction, the government promised support for the export economy.

The government wants to reactivate exports and investments by pushing ahead with deregulation efforts and offering fiscal and financial aids, Finance Minister Choo Kyung-ho said.

However, the scope for subsidies is limited.

The Conservative government plans to cut spending by 6 percent this year.

President Yoon Suk-yeol wants to reduce the budget deficit from 3.3 to 0.6 percent.

This is a departure from the policies of predecessor Moon Jae-in, which had significantly increased government spending over the past five years.

Economists like Gareth Leather of Capital Economics see the new government's austerity measures as a brake on growth this year.

China as a customer fails

The poor economic development in the quarter from October to December reflects the difficult situation of the global economy and South Korean consumers.

Exports of goods and services shrank 5.8 percent and imports 4.6 percent in the fourth quarter.

The decline in exports began in the second half of last year as the global economy slowed and major central bank rate hikes, Russia's war against Ukraine and the Covid lockdowns in China all left their mark.

The large neighbor China is the most important customer country for South Korea.

South Korea is also particularly affected by the slump in demand in the global electronics industry.

Big names in the semiconductor industry such as Samsung Electronics and SK Hynix are among South Korea's most important exporters, but are currently experiencing a significant dip in demand.

First data from January indicate that exports will continue to contract.

According to a survey by the South Korean Foreign Trade Association, exporters are primarily worried about the global economic slowdown and rising raw material costs this year.

A slump in consumption and misfortune weigh on them

The second major negative factor for the South Korean economy is currently consumption.

After the most important restrictions against Covid-19 were lifted in 2022 and life returned to normal, many South Koreans made up for postponed purchases.

This special effect fizzled out after the summer half-year.

At the end of the year, consumption fell by 0.4 percent compared to the previous quarter.

Propensity to buy was dampened by the tragedy in Seoul's Itaewon entertainment district, which sparked nationwide mourning.

More than 150 people were killed in a stampede during Halloween celebrations in late October.

The interest rate hikes by the Bank of Korea since August 2021 from 0.5 to 3.5 percent are also weighing on households that previously had high levels of debt.

Recently, house prices have fallen significantly and there are concerns about a slump in the real estate market.

Last but not least, high inflation in South Korea is depressing consumer spending.

Inflation reached 5.1 percent last year, twice the level of the previous year.

The Bank of Korea believes it has peaked and expects a fall back to 3.6 percent this year.

This supports expectations that the central bank may have peaked this month with rate hikes to 3.5 percent.

But even at 3.6 percent, inflation would still be higher than the inflation target of 2 percent.