South Korean Q1 GDP expands wider-than-expected despite rise in geopolitical tensions

The South Korean economy grew 0.9 percent in the first quarter (3.6 percent at an annualized rate) which beat consensus. In fact, the outturn matches the fastest quarterly growth rate posted in 2016. Despite a pick-up in exports, trade was actually a net drag on Korean GDP growth in the first quarter owing to an even larger surge in imports, which posted the largest sequential increase in six years.

Last year (2016) was a mediocre year for imports with two quarterly declines amid a backdrop of only tepid domestic demand, so low base effects may have played a role. The official press release also noted the surge in imports was attributable to an expansion in imports of machinery & equipment as well as precision instruments reflecting a demand-pull from the business sector.

Amid the recent escalation in tensions, the United States recently installed a missile defense system in South Korea. The stated purpose is to protect South Korea, Japan and other U.S. allies in the region from a potential North Korean missile launch. The move is not welcomed by China, Korea’s largest export destination, who sees the installation as a check against Chinese power in the region as well.

The Chinese government banned Chinese tour groups from visiting South Korea and is encouraging a boycott of South Korean goods in China. While current export figures are not available, tourism visits are. In March only 360,782 Chinese tourists visited Korea, down from 601,671 in the same month last year. Chinese visitors usually comprise about half of all the tourism in Korea, but in March, that share fell to just 29.2 percent.