Nominal Growth Rate Surpasses 10% for First Time in 50 Years... Unlike Past Inflation Surges (Comprehensive)

"Driven by Improved Profitability of Export Companies, Not Domestic Price Increases"

Export Deflator Surges 23.5%, While Domestic Demand Rises Only 2.1%

A Sharp Contrast to Cost-Push Inflation of the 1970s and 1980s

The nominal economic growth rate, which serves as an indicator of South Korea's economic scale, reached 10.5% in the first quarter of this year. This is the first time in 50 years that the nominal growth rate has recorded double digits quarter-on-quarter, since the economic recovery phase following the first oil shock in 1976. Unlike the cost-push inflation of the 1970s and 1980s, this rapid growth is not due to domestic price hikes but rather improved profitability of export companies. Thanks to an unprecedented boom in semiconductors, not only did production volume surge, but the prices of products sold by Korean companies in overseas markets also soared, driving up the nominal growth rate.

The provisional real gross domestic product (GDP) growth rate, a key measure of economic growth, was adjusted upward by 0.1 percentage points from the initial estimate to 1.8%. Accordingly, there is a growing likelihood that this year's annual economic growth rate will exceed last month's forecast of 2.6%. There are also strong signs that South Korea is on track to achieve a per capita national income of 40,000 dollars this year.

Nominal GDP Growth Rate Jumps to Double Digits for First Time in 50 Years ... Significance

On the 9th, the Bank of Korea announced that the provisional nominal GDP growth rate for the first quarter was 10.5% quarter-on-quarter. This is the first time since the first quarter of 1976 (13.0%) that the quarter-on-quarter growth rate has reached double digits in 50 years. Compared to the same period last year, nominal GDP grew by 17.1%, the highest since the third quarter of 1995 (19.2%).

The nominal growth rate is calculated by applying the GDP deflator, which reflects price changes in the market, to the real growth rate. While the real growth rate, which excludes price factors, shows how much the economy has actually grown (the fundamentals), the nominal growth rate is used to gauge the overall size of the national economy.

The high nominal growth rate in the first quarter was largely driven by a 17.0% increase in gross operating surplus (corporate earnings minus labor costs) in the manufacturing and financial and insurance sectors compared to the previous quarter. Compensation of employees, which reflects labor costs, also rose by 4.0% during the same period, mainly due to higher wages in the manufacturing sector. In addition, rising export prices contributed to the growth in nominal GDP. The GDP deflator, which indicates the overall price level in the domestic economy, surged by 12.9% year-on-year in the first quarter. More specifically, the domestic demand deflator increased by only 2.1%, while the export deflator jumped by 23.5%.

Kim Hwayong, Head of the National Income Department at the Bank of Korea, emphasized, "The clear expansion of nominal GDP growth observed from the first quarter of this year is due to a significant improvement in the profitability of our export companies, not a rise in domestic prices." He explained that it is important to distinguish this situation from the ‘cost-push inflation’ of the 1970s, 1980s, and 1990s, when the gap between nominal and real GDP exceeded 10% due to rising costs.

Professor Kwak Noseon of Sogang University’s Department of Economics also analyzed, "The fact that nominal GDP has risen much more than real GDP, along with an increase in the GDP deflator, means that the prices of semiconductors and other goods we produce have increased significantly. The price of export goods has risen more than that of import goods, resulting in higher national income."

Real GDI Surges 13.2% ... "Growth Trend Likely to Continue for Some Time"

Real gross domestic income (GDI), which represents the real purchasing power of income earned through a country's production, jumped by 13.2% year-on-year in the first quarter, far exceeding the 3.8% growth in real GDP. This is also due to the impact of higher semiconductor prices.

Kim pointed out, "Usually, in Korea, when international oil prices rise, the terms of trade deteriorate and GDI increases less than GDP. However, this time, the increase in semiconductor prices has outpaced the rise in the prices of key imports such as oil and energy, resulting in the highly unusual situation where GDI has greatly outstripped GDP." The increase in real GDI can be interpreted as a rise in the capacity for consumption and investment, suggesting that this growth trend could continue for a considerable period.

Kim further stressed, "When export and import prices fluctuate rapidly as they have this time, it is necessary to supplement real GDP, which focuses on production volume, with nominal GDP and real GDI indicators in assessing the economic situation."

First Quarter Real GDP Grows 1.8% ... Last Year’s Per Capita National Income at 52.57 Million Won

Real GDP, which excludes price factors, rose by 1.8% quarter-on-quarter. This is an upward revision of 0.1 percentage points from the preliminary figures released in March. Compared to the same period last year, the growth was 3.8%, which is 0.2 percentage points higher than the initial estimate. Kim explained, "The upward revision was driven by reflecting additional data from the final month of the quarter, which had not been available for the preliminary estimate, resulting in a 1.8 percentage point upward adjustment to facility investment and a 0.1 percentage point increase in private consumption."

With the upward revision of the first quarter’s real growth rate, the annual growth rate for this year is also likely to exceed the previous forecast of 2.6%. Kim stated, "A 0.1 percentage point upward adjustment in the first quarter’s real GDP could raise the annual growth rate by 0.1 percentage points. However, since other changing conditions must also be reflected, a comprehensive revised forecast will be released again in August."

Real gross national income (GNI) in the first quarter increased by 9.2% quarter-on-quarter, far outpacing the growth rate. This is the largest increase since the statistics have been compiled. The surge in real GNI was due to improved terms of trade and a sharp rise in net factor income from abroad (the difference between income earned by Koreans overseas and income earned by foreigners in Korea), which jumped from 8.2 trillion won to 11.6 trillion won.

Meanwhile, last year’s per capita GNI rose by 154,000 won from the March preliminary figure to 52.57 million won, a 4.6% increase from the previous year. In dollar terms, it reached 36,963 dollars, up 108 dollars from the March preliminary figure. Due to the effects of a strong won, the dollar-denominated growth was limited to just 0.3% year-on-year. Kim said, "The likelihood of achieving a per capita GNI of 40,000 dollars this year has increased. We now expect this to happen earlier than the previously anticipated 2028, but exchange rate developments will need to be closely monitored."

Nominal Growth Rate Expected to Remain in Double Digits This Year ... Macroeconomic Soundness Indicators Likely to Improve

Kim Hwayong, Head of the National Income Department at the Bank of Korea (photo), is speaking at the briefing session on the provisional national income for the first quarter of 2026 held at the Bank of Korea in Jung-gu, Seoul on the morning of the 9th. /Photo by Bank of Korea

There is growing support for the view that the nominal economic growth rate will remain in the double digits this year. If this happens, it will be the first time in 24 years since 2002 (11.0%) that double-digit growth has been achieved. Kim predicted, "The rise in nominal GDP growth due to improved corporate profitability will significantly ease the government’s fiscal burden and have a positive impact on stimulating domestic demand." He added, "The expansion of corporate operating profits leads to an increase in corporate tax revenue, which can be used not only to stabilize public finances but also as a resource for structural reforms, and the expansion of R&D and facility investment can also contribute to boosting domestic demand."

If a double-digit nominal growth rate is achieved for the year, macroeconomic soundness indicators such as the household debt ratio, which are calculated based on this rate, are also expected to improve. The government aims to lower the household debt ratio to around 80% by 2030. If the nominal GDP growth rate reaches 10% and the household debt growth rate meets the government target of 1.5% this year, the household debt-to-GDP ratio is estimated to reach 81.8%, the lowest level in 11 years. If the nominal GDP increases by 12% this year, the household debt ratio could drop to as low as 80.3%.

However, some point out that the government, with increased fiscal capacity from higher tax revenues, should focus more on targeting the necessary segments of the population. Professor Kwak commented, "Given the inflation rate, government measures should focus on supporting vulnerable groups rather than broad-based expansionary policies such as oil price caps. Also, since only a few companies like Samsung Electronics and SK hynix are clearly showing strong results, we must be wary of a bubble in the asset effect."

This content was produced with the assistance of AI translation services.