South Korea, Asia’s fourth-largest economy, barely managed to avoid a recession after posting sluggish growth in the first quarter of the year. The country avoided a technical recession as the acceleration in services activity partially offset the manufacturing sector's decline.

According to a Reuters article, as quoted on Nasdaq, subpar exports followed by reducing debt burdens among households and the lack of significant government intervention challenge the growth prospects of the economy.

Economic Outlook

Being a heavily trade-reliant economy, the outlook for the country remains uncertain against the backdrop of sluggish exports resulting from a cooling global economy, despite China’s reopening. Being South Korea’s biggest trading partner, the exports to China dropped about 33.4%, contributing to an overall decline of 12.6% in exports from the same quarter of the previous year.

Per Reuters, South Korea’s GDP expanded by 0.3% in the first quarter over the previous the three-month period. Private consumption was the primary driver of GDP growth, having increased 0.5%. However, lower capital investment hindered economic growth, falling by 4.0%. Despite this, exports rose by 3.8% and imports increased by 3.5%.

Economists expect the Bank of Korea to refrain from hiking interest rates further after having done so since 2021, increasing the rates by 300 bps. The South Korean central bank, in its last meeting left the interest rates steady for the second consecutive time, stating that the high but cooling inflation is a much bigger cause of concern than an economic slump.

Any Positive Note for the Economy?

Many economists forecast that the export sector is likely to witness a slight improvement in the second quarter of the year. However, the economic recovery of the external sector is expected to be restricted due to the slow revival of demand from major advanced countries apart from China.

With the IMF forecasting a projected GDP growth rate of 1.5% for 2023, a resurgence in the IT sector and an improvement in the Chinese economy are likely to fuel the recovery in the latter half of the year.

ETFs in Focus

Below, we highlight a few exchange traded funds with an exposure to South Korea.

Franklin FTSE South Korea ETF (FLKR Quick QuoteFLKR - Free Report)

The fund seeks to provide investment results that closely correspond to the performance of the FTSE South Korea RIC Capped Index, which represents the performance of South Korean large and mid-capitalization stocks. With 160 securities in its basket, FLKR is invested majorly in the information technology sector with a 33.11% share of assets, followed by industrials and materials with a share of 13.06% and 11.50%, respectively.

The fund charges an annual fee of 0.09% and has a Zacks ETF Rank #2 (Buy). The fund fell by 9.24% over the past year but is up by 8.22% year to date. FLKR commands an asset base of $296.07 million with a traded daily average volume of about 10,100 shares.

iShares MSCI South Korea ETF (EWY Quick QuoteEWY - Free Report)

Tracking the investment results of the iShares MSCI South Korea ETF, EWY holds 103 securities in its basket. The fund has the highest allocation to the information technology sector with 34.43%. Industrials and materials follow next with an allocation of 12.39% and 11.53%, respectively.

EWY has a Zacks ETF Rank #2 with a Medium risk outlook. It has given returns of 8.29% year to date but has declined 8.32% over the past year. The fund has amassed $3.36 billion in its asset base and charges an annual fee of 0.58%. It has a traded daily average volume of around 3.77 million shares.