South Korea’s economic growth accelerated more than expected in the last quarter as exports recovered and construction investment rebounded, brightening prospects for President Yoon Suk-yeol after an election setback that threatens his economic initiatives.

Gross domestic product advanced 1.3 per cent in the three months to March versus the previous quarter, the Bank of Korea (BOK) said on April 25, an advance that soundly outpaced economists’ consensus for a 0.6 per cent expansion. The economy grew 3.4 per cent year on year.

South Korea expects its economic growth to accelerate to more than 2 per cent in 2024, as exports continue to advance. Global demand for technology products such as semiconductors has been a key driver, while momentum is starting to broaden to other industries. Growth in exports sped up to 8.3 per cent in the first quarter from 5.7 per cent in the previous period, according to Bloomberg Economics economist Hyosung Kwon.

Construction investment returned to growth in the first quarter after a 4.5 per cent contraction in the previous three-month period. The government said in February that it would accelerate the implementation of infrastructure projects and public-private partnerships to shore up industry, where activity has been hurt by credit risks.

From the previous quarter, private consumption rose 0.8 per cent, while government spending was up 0.7 per cent. Exports in real terms increased 0.9 per cent, as facilities investment fell 0.8 per cent, according to the BOK.

Manufacturing output increased 1.2 per cent from the previous quarter, with chemical products and transportation equipment leading the activity.

Public works and building construction played a central role in boosting the construction industry, which grew 4.8 per cent in the first quarter, the central bank said.

Risks remain for the economic outlook. Central banks around the world have kept interest rates elevated to tame inflation, and Middle East tensions are flaring up.

South Korea’s currency briefly weakened to the key psychological level of 1,400 won per US dollar last week, prompting warnings of intervention from policymakers. 

Debt concerns continue to cast a shadow over the construction industry and consumers are tightening their budgets as they cope with persistent price pressures.

“The fact that net exports are a core driver of growth with the largest contribution will stay unchanged as inflation keeps putting pressure, and real purchasing power among households remains insufficient,” KB Securities economist Gweon Heejin said in a note before the GDP release.

Government spending has also slowed compared with the pandemic era, when stimulus helped tide the economy over.

Mr Yoon has sought to restore fiscal health by exercising restraint ever since taking office in 2022. That policy stance may change in the wake of parliamentary elections earlier in April that resulted in a drubbing for his People Power Party. He will now be under pressure to accommodate opposition demands for more stimulus.

Mr Lee Jae-myung of the opposition Democratic Party has called in particular for handouts worth about 275,000 won (S$270) for each citizen.

The electoral defeat also complicates Mr Yoon’s efforts to reduce wealth taxes and buttress relations with the US and Japan during the remainder of his tenure that ends in 2027.

Mr Yoon has made stronger economic and technology ties with the US a centrepiece of his administration.

The trend in worldwide trade bodes well for South Korea, with the World Trade Organisation expecting a gradual recovery in the early months of 2024. “But any gains could be easily derailed by regional conflicts and geopolitical tensions,” the global organisation said in March.

China will play a key role for its neighbour. The nation remains South Korea’s biggest trading partner, with its exports to the world’s second-largest economy rising 9 per cent from a year earlier for the first 20 days of April.

South Korea’s shipments to the US rose 22.8 per cent, while those to Vietnam grew 26.6 per cent.

There are signs the situation in China is improving. Its manufacturing activity expanded in March for the first time since September, while GDP figures for the first quarter soundly beat expectations, with the nation targeting about 5 per cent growth for the year. Still, growth was mostly driven by public investment, with private demand remaining fragile.

As South Korea’s economic growth picks up, it can provide more scope for the central bank to keep its benchmark rate restrictive for longer. Keeping its focus on inflation, the BOK held the rate steady for a 10th time earlier in April.

“Part of the reason is the economic recovery so far – powered by external demand – has remained remarkably strong even with restrictive levels of interest rates,” Mr Kelvin Lam, a Pantheon Macroeconomics economist, said in a note. He expects a rate cut in the third quarter of 2024. BLOOMBERG