This report analyzes the characteristics and implications of Korea’s recovering domestic economy and the notable trends and changes of recent private consumption. 
    Korea’s domestic economy (GDP), which has continued its upward spiral since the second half of 2012, began to recover at a faster pace in Q2 of 2013. The growth rate of GDP continued to rise from 0% in Q3 of 2012 to 0.3% in Q4 of 2012, 0.8% in Q1 of 2013, and 1.1% in Q2 of 2013 (all compared to the previous quarters). However, it is questionable whether this trend will be sustained as the business recovery during Q2 was mainly led by policy impacts of construction investment (4.1% in Q1→3.3% in Q2) and government consumption (1.2% in Q1→2.4% in Q2). In order to reach the government’s target economic growth rate of 2.7% in 2013, the growth rate throughout the second half must be maintained within the 3.5% range at the lowest (compared to the previous year). It appears the government’s target export growth rate (2.8% in 2013 on a customs clearance basis) will be achieved fairly easily as exports (on a customs clearance basis) during the second half are projected to pick up, albeit at a sluggish pace, powered by the recovering economies of advanced countries. 
    However, capital investment is expected to make relatively weak improvements in the second half compared to export-related indexes due to overcapacity (with the operating ratio of the manufacturing industry on a downturn and economic growth continuously failing to reach the potential growth rate), the worsening profitability of corporations, and projections for a stuttering economic recovery in Korea and beyond (with the IMF lowering its estimate of the global economic growth rate). The possibility to reach the government’s target economic growth rate in 2013 (2.7%) will naturally hinge on whether the recovery of capital investment gains pace. The Ministry of Strategy and Finance projects that capital investment in 2013 will grow by 1.7%; but, capital investment during the first half of 2013 continued to show a substantial decrease (an 8.5% decrease from the previous year).
    Private consumption in Q2 of 2013 rose by 1.7% compared to the previous year, showing a narrow yet positive increase from 1.5% in Q1. Private consumption began to pick up in Q2 because GDI increased rapidly due to improvements in the terms of trade (2.3% in 2012→4.2% in the first half of 2013); the increases in the number of the employed and wage growth rose; and consumers’ real purchasing power has improved due to stabilized market prices.
    As the Composite Consumer Sentiment Index, designed to measure consumer opinion on the general status of the economy, recorded 105 in July as in June – surpassing the standard value of 100, it is expected that private consumption will continue to recover at a modest pace in the second half.
     
Won Dongah