South Korea's nominal gross domestic product (GDP) growth rate exceeded 10% in the first quarter of this year for the first time in 50 years, prompting analysts to say the government's expansionary fiscal stance has received a green light. Because the government bases its tax revenue projections on nominal GDP when drafting budget proposals for revenue and expenditure, a larger nominal GDP suggests tax revenue will increase more than initially expected. As nominal GDP rises, the national debt ratio also falls, removing an obstacle to fiscal expansion.
Corporate operating profits this year are also likely to increase broadly. According to the Bank of Korea (BOK) on Tuesday, total operating surplus (corporate profit minus labor costs)—a component of nominal growth—rose 17% quarter-on-quarter in the first quarter, led by manufacturing and the finance and insurance sectors. The increase in corporate operating profit translated into a surge in nominal growth.
Rising export prices, centered on semiconductors, also contributed to lifting the nominal growth rate. The nominal growth rate is calculated by applying the GDP deflator—an index reflecting the overall domestic price level—to the real growth rate. This index rose 12.9% year-on-year in the first quarter. In detail, the domestic demand deflator rose 2.1% over the same period, while the export deflator climbed sharply by 23.5%.
"This surge in nominal GDP differs from the cost-push inflation of the 1970s and 1980s and is thanks to a significant improvement in the profitability of export companies," said Kim Hwa-yong, head of the BOK's national income division. "The expansion of nominal indicators driven by improved corporate profitability will greatly ease the government's fiscal burden while also having a positive effect on stimulating domestic demand."
Nominal GDP growth also leads to improvements in fiscal soundness indicators. This is because the national debt ratio is calculated by dividing the national debt by nominal GDP. In the national fiscal management plan submitted to the National Assembly last September, the government projected that national debt would rise to 1,415.2 trillion won this year, raising the ratio to GDP to 51.6%, up 4 percentage points from last year. However, a simple calculation assuming this year's nominal GDP growth rate of 10% narrows the increase in the national debt ratio to 0.7 percentage points, rising only to 48.3%.
For this reason, the current government has recently emphasized nominal growth over real growth. President Lee Jae-myung said last month that "there are observations that this year's nominal growth rate could approach 10%." Kim Yong-beom, head of the presidential policy office, also said on his social networking service (SNS) on April 24 that "Korea's economy this year is entering a phase where the nominal growth rate approaches 10%." The Organisation for Economic Co-operation and Development (OECD) also projected Korea's nominal growth rate at 10.4% this year.
However, some point out that the other side of the surge in nominal growth must be examined. "The surge in nominal growth reflects an economic recovery but also implies greater inflationary pressure than in the past, which could increase the burden on the government in operating policy going forward," said Kim Sang-bong, professor of economics at Hansung University.
Meanwhile, the preliminary figure for the first quarter's real GDP growth rate was revised up 0.1 percentage point to 1.8% from the advance estimate of 1.7%, raising the likelihood that the full-year growth rate will also rise further.
"The 0.1 percentage point adjustment in the first-quarter real GDP growth rate has the effect of raising the annual growth rate by 0.1 percentage point," Kim said. "We expect to make projections based on the changed conditions at the August economic outlook." At the time of the May economic outlook, the BOK's projection for this year's real GDP growth rate was around 2.6%. In other words, the likelihood that this year's growth projection will rise to 2.7% or higher has increased.
The BOK expects that this year's per capita gross national income (GNI) will also increase significantly as nominal GDP surged in the first quarter. According to the "2025 National Accounts (Preliminary)" released by the BOK on Tuesday, Korea's per capita GNI last year was $36,963, up 0.3% from $36,857 the previous year. If this figure is finalized, it means Korea will have been stuck in the "$30,000" range for the 12th year. However, if this year's nominal GDP increases by around 10%, per capita GNI could break free from the mid-$30,000 range.
"If the current high nominal growth pace continues, per capita GNI will approach $40,000 this year," Kim said. "It is clear that the likelihood of reaching $40,000 earlier than 2028 has increased, but it will depend on corporate earnings and the direction of the won-dollar exchange rate."
