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Preliminary estimates from the Bank of Korea (BOK) showed, Tuesday, that the nation’s gross domestic product (GDP) increased by 0.6 percent in the second quarter from the previous three months when it grew 0.3 percent.

The central bank said the back-to-back quarterly growth suggests Asia’s fourth-largest economy is on a recovery path after contracting 0.3 percent in the fourth quarter of 2022.

Nevertheless, analysts found Korea’s growth trend to be worrisome, as it was driven by a sharp decline in imports and not by the country’s twin growth engines ― exports and consumer spending.

The BOK data showed exports slid 1.8 percent, but imports retreated at a much faster rate of 4.2 percent, resulting in a net growth contribution of 1.3 percentage points.

Private spending fell 0.1 percent compared to the first quarter when it rose 0.6 percent to become the biggest contributor to GDP.

The BOK attributed the decline in private spending in the second quarter to a fall in spending in the service sector, such as restaurants and travel accommodations, despite an end to the COVID-19 emergency.

Government spending also dropped 1.9 percent due to a decline in expenditures on social security benefits, while investments in construction and facilities shrank 0.3 percent and 0.2 percent, respectively.

For the first half of 2023, GDP expanded 0.9 percent from a year earlier to surpass the BOK’s 0.8 percent growth estimate announced in May.

The BOK referred to its 2023 growth target of 1.4 percent and noted that the country’s economy will need to advance about 0.7 percent each in the third and four quarters and reach 1.7 percent growth in the second half of the year on a year-on-year basis.

Some economists remained skeptical of Korea achieving the BOK’s yearly growth target, saying the expansion led by the steep decline in imports in the second quarter is “witnessed in economies that struggle to gain growth momentum on their own.”

“The Korean economy is anticipated to keep expanding in the next two quarters considering that the end is in sight of global rate hikes, including Korea’s, and that demand for goods will increase in return,” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).

“But we still have slower-than-expected spillover effects from China’s reopening that can continue to affect Korea’s economy, and the growth in the third and fourth quarter, respectively, will not be much different from the second half.”

Speaking on condition of anonymity, a researcher at a commercial bank voiced a similar view, saying “The quarterly growth can be lower than 0.7 percent for each of the two remaining quarters.”

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From a business standpoint, chaebols have a huge influence on the Korean economy because the country’s top four family-controlled entities ― Samsung, SK, Hyundai and LG Group ― account for more than half of the nation’s exports. In fact, these leading chaebol help bring in the majority of Korea’s capital.

While it’s true that there have been numerous controversies, debates, criticism and setbacks regarding their role in Asia’s fourth-largest economy, the point is that consolidating greater market resources to these top-tier industrial conglomerates puts the overall stability of Korea at risk, should they fail.

Samsung, for example, represents more than 20 percent of Korea’s gross domestic product (GDP). The global leader in memory semiconductors, screens and smartphones, Samsung is the largest and most powerful of them all.

However, Samsung’s key businesses are losing their sheen. That doesn’t mean the country’s top chaebol is worrying about its sustainability, but it’s fair to say that the heyday for Samsung’s traditional profit drivers such as TVs, smartphones and memory chips is likely over.

Samsung has admitted that it faces increasingly difficult challenges in terms of accelerating corporate innovation to explore new business areas of growth. While it has set Taiwan’s foundry king TSMC as its chief competitor, analysts say tremendous efforts and continuous large-scale spending are necessary for Samsung to narrow its market gap with the rival in the promising and highly lucrative foundry chip sector.

“Yoon Suk-yeol’s decision to grant a special pardon to Lee Jae-yong, Samsung’s leader, is because the Yoon government wants to increase Samsung’s contributions to the national economy amid rising inflation, interest rates, geopolitical risks and supply chain disruptions. Given the country’s unique chaebol structure, Lee is the only person who can make critical decisions on investments and mergers and acquisitions (M&As). Within that context, Samsung must have a kind of a control tower,” an official at a U.S.-based private equity firm said by telephone.

Some reform advocates claim the country needs to end its decades-long reliance on these big businesses. But the dismay of critics over the Samsung leader’s special pardon isn’t backed by the broader populace, as more than 65 percent supported the pardon, according to various polls. This is a reflection of the expectations of Koreans that Samsung needs to expand and grow during these troubled times, especially with the specter of a potential economic downturn.

No sizable M&As, revival of new nerve center?

Lee’s official signoff is required for many major decisions at Samsung, according to company officials. Samsung sources say that chances are high for Lee to officially take over as group chairman next month at the earliest.

“In Korea, CEOs act more like COOs (chief operating officers) as only owner families have the full authority for crucial decisions regarding a corporation’s path and growth. This has also been very true for Samsung. It’s necessary for Samsung to have a vehicle to help Lee make key decisions such as investments, acquisitions and restructuring,” one insider said.

Despite its 200 trillion won in cash and cash-equivalent holdings as of this month, Samsung hasn’t been very active in making sizable acquisition deals, acquiring only 29 companies including seven in the last five years. A total of four acquisitions involved private equity firms (PEFs). Samsung’s largest-ever acquisition was its purchase of Harman for $8 billion in 2016, one year before it decided to dismantle the “control tower” unit within its structure. For Samsung, acquisitions are a sound way of reaching its growth goals.

In 2017, Samsung disbanded its corporate strategy office as it was the center of criticism for its controversial role in a massive graft scandal that shook the nation at the time. The office had some 250 elite staffers who were hand-picked from the group’s core affiliates before being dismantled. The office had been considered the group’s nerve center. Since then, Samsung’s leadership structure is currently being led by separate task force teams in three group affiliates.

“Discussions are underway for the establishment of a new control tower with a Samsung-established compliance monitoring committee navigating the best possible ways for the conglomerate to better perform the functions of a new nerve tower. Given the vast scope of businesses, the creation of an independent entity assigned to help address group-level affairs is necessary,” another insider said on condition of anonymity citing the sensitivity of the issue.

Representatives at Samsung headquarters in Seoul said they are not in a position to comment on this issue.

The benefits of having a control tower are ensuring end-to-end visibility, reduced costs, increased productivity and implementation of the most effective target strategies. But critics say that because the 2017 decision to disband its corporate strategy office was due to its control over all critical affairs, the new office if created, will likely have reduced responsibilities in terms of defending the interests of the Samsung owner family.

“I would expect an announcement of Samsung’s new nerve center will come after the completion of the specifics of an operations manual by its own compliance monitoring committee. The new control tower will have to highlight its transparency when it comes to the operation as Samsung is set to move forward with more corporate revamp plans,” said Kim Kwang-jin, an analyst at Hanwha Investment.

Lee, who holds the title of vice chairman of Samsung Electronics, is directly involved in discussions with senior members of its compliance monitoring committee, as he is moving towards more board-focused management to improve corporate governance. Lee was a board member at a now-defunct flat-screen joint venture between Samsung and Japan’s Sony, S-LCD, although it remains to be seen whether he will take a role in Samsung Electronics’ board in its annual year-end reshuffle.

Last year, Samsung merged its smartphone and home appliance units to develop a Galaxy-branded ecosystem that goes beyond smartphones and into other consumer electronics, mimicking Apple’s corporate structure.

Analysts said because the key competition point is moving away from devices themselves to developing ecosystems, Samsung has to be quick to address growing investor concerns over the flat growth of its key businesses, as well as its current stale vision for the future.

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According to an analysis conducted by the Korea Economic Research Institute (KERI), the country’s economy could continue to shrink next year if a prompt rollout of the coronavirus vaccine is delayed.

Both the Bank of Korea (BOK) and the Ministry of Economy and Finance have forecast that Asia’s fourth-largest economy will shrink 1.1 percent this year.

“If the vaccine rollout campaign is delayed until the second quarter of next year, the country’s economy will shrink for the second consecutive year,” the KERI said in the report.

“Depending on the number of confirmed COVID-19 patients, the economic contraction could be between 2.7 percent and 8.3 percent.”

It also expected that the vaccine rollout delay could cut Korea’s trade volume in 2021 by 15.5 percent year-on-year, in the worst-case scenario.

“The KERI’s internal analysis also showed the country’s unemployment rate would rise by between 0.5 and 21.7 percentage points next year, upon rolling out of the coronavirus vaccine,” it added.

But it expects if the government launches the public vaccination program in the first quarter of the year and the process goes smoothly, then the economy could grow 3.4 percent next year. With the country seeing increased deaths from COVID-19 alongside daily new infections rising to more than 1,000, the country is moving rapidly to procure more vaccines.

Amid a stubborn third wave of infections, which have been forcing the health authorities to further tighten social distancing measures, Cheong Wa Dae and the ruling party agreed to launch a public coronavirus vaccination program in late January, the earliest possible date.

Seoul had planned to stockpile vaccines but apparently delay administering them until other nations began to see how programs in the United States and European countries, which have been hit with more disastrous outbreaks, progressed.

After signing vaccine procurement agreements with AstraZeneca, Pfizer and Johnson & Johnson’s Janssen, the government said it recently struck a similar deal with Moderna to procure 40 million doses. Moderna confirmed this saying potential distribution of the two-dose vaccine in Korea could start sometime in the second quarter of next year.

The KERI report came after the country’s overall consumption declined for the second consecutive month amid a resurgence in daily new virus cases. The country’s statistics agency said retail sales dropped month-on-month in November and added that they may also shrink in December amid the rising number of infections.

The government has been determined to fight the virus while keeping the economy operating as much as possible. The “dual-track” approach had worked as the country didn’t close its borders with neighboring countries as seen in some countries in Europe, or lock down the country’s major cities.

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