Jihoon Kim

SEOUL (Reuters) – South Korea’s economy saw a nearly 50% drop in its first quarter compared to the three prior months due to surging inflation and coronavirus curbs. However, the future outlook was clouded by a slower Chinese economy.

According to preliminary data released by the Bank of Korea on Tuesday, the gross domestic product grew 0.7% seasonally in the first quarter compared with the previous quarter of 2021. This was a slowdown from 1.2% a quarter ago, but still better than the 0.6% reported in a Reuters poll.

“Domestic consumption will rebound as domestic COVID-19 curbs were mostly lifted, but China’s slowdown would severely hit exports and the overall economy in the current quarter,” said Park Sang-hyun, economist at HI Investment & Securities.

South Korean stocks, and won currencies saw modest gains following the data.

This data is coming as an IMF senior official warns that Asia will face a “stagflationary outlook” with possible downgrades in growth projections, and rising price pressures.

The 0.5% contraction in private consumption was the most severe in five quarters. Social distancing regulations were imposed by the government to reduce an increase Omicron Coronavirus cases.

The fastest drop in capital investment over the past three years was 4%. Construction investment dropped 2.4%.

Comparable to economists’ prediction of 2.8% growth, 3.1% was seen in the economy from a year ago.

In May’s next review, the BOK expects to lower this year’s growth projections by 3%. This is despite China facing headwinds due to the Ukraine war and U.S. tightening of monetary policy.

Rhee Chang-yong, the BOK’s new governor, said that last week economic growth was expected to decline further than earlier forecasts. He also stated that monetary policy will need to address both inflation threats and risks to growth.

According to Reuters, South Korea’s economic growth was projected at 2.8% and 2.6% respectively in 2019, after having grown by 4% over the past 11 years.

Surprise move by the BOK to intensify the fight against inflation, this month’s benchmark rate was raised to 1.50%.

Recently, the IMF lowered its projections for 2022’s economic growth to 2.5% from 3.0% and raised its inflation projections by 4.0% to 3.1%.