Uncertanities cloud Korean economy
By Jung Sung-ki
Despite a faster-than-expected recovery, the outlook for the Korea economy still remains unclear due to lingering uncertainties abroad, such as rising oil costs, China’s slowing growth rate, the knock-on effect from the Japanese earthquake and the European sovereign debt crisis, according to government officials and economic analysts.
The rise in oil prices, in particular, is a headwind to Korea’s economic growth, as the fourth largest economy in Asia is heavily dependent on imports.
Bank of Korea Governor Kim Choong-soo echoed those worries earlier this month.
“The run-up in oil prices associated with the political unrest in the Middle East and North Africa, the aftermath of the Japanese devastating earthquake and the fiscal problems of certain European countries will act as major downside risk factors,” Kim said April 21 after a rate-setting meeting.
Moody’s senior vice president Tom Byrne anticipated should the oil price head above $120 a barrel, the effects will be more severe.
HSBC chief economist Frederic Neumann noted, “Korea is quite dependent on export growth and high oil prices could slow demand elsewhere in the world, thus dampening Korea’s surging export performance.
Growth slowdown for China
Another risk to the Korean economy is a potential cooling of the Chinese economy, according to experts.
“Korea has been among the best positioned economies to take advantage of China’s extraordinary rise,” Neumann said. “A setback in China, however, could also cool export growth in Korea.”
Inflationary pressure in China is also likely to spread to Korea, and the contraction of the world’s second largest economy could hurt the latter’s exports.
The People’s Bank of China raised the deposit reserve requirement ratio by 0.5 percentage points to 20.5 percent recently in an effort to keep inflationary pressure down. In March, China’s inflation rose to a 32-month high of 5.4 percent on increasing domestic demand.
Park Young-joon, a researcher at the Korea Institute for International Economic Policy, said that inflation in China tends to precede that in Korea by seven months.
He said that a one-percent increase in China’s consumer prices cause Korea’s to go up 0.12 to 0.15 percent, and the impact tends to last for a long time.
“Studies show that inflation in China had little influence on Korea until the 1990s, but, in the 2000s, became one of the most important overseas factors for inflation in Korea along with oil prices,” Park said, adding that the effect of a ten-percent increase in Dubai oil prices is equivalent to a one-percent rise in China’s consumer prices.
Korean firms that operate locally in China saw nearly 60 percent of their revenue from sales there in 2009 ― up nine percent from 2006. Weaker consumption as a result of the slower economic growth could hurt Korean companies.
Impact of Japan’s earthquake
Korea and other Asian countries are expected to be adversely affected by short-term supply disruption, weaker demand from Japan, following the deadly earthquake last month.
But reconstruction demand from Japan should benefit Asia by year’s end, analysts say.
Korea mostly exports machinery and manufactured metals to Japan, as well as petroleum products, chemicals and food products. Demand for these items will suffer in the immediate aftermath of the disaster amid disruptions, though shipments should strengthen during Japan’s reconstruction phase.
Given Korea is reliant on imports from Japan, particularly electronic parts, as inputs to its production processes, supply shortages will crimp output and thus harm the Korean GDP growth, according to Moody’s Analytics.
On the upside, Korea competes with Japan in semiconductors, autos and steel, and thus has the opportunity to boost its market share if a factory shutdown in Japan persists.