Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Korea faces risk of slipping into L-shaped economic slump: experts
Cranes unload containers from a ship at a port in Busan, Oct. 11. Yonhap
By Yi Whan-woo
Israel-Hamas war adds to uncertainties affecting Asia's 4th-largest economy
Korea faces an increased risk of an L-shaped economic slump, according to analysts, in stark contrast to the government’s forecast that the economy will overcome sluggish performance in the first half of this year and recover in the remaining half.
The gloomy forecast comes as global economic uncertainties remain high, casting a shadow on Korea’s exports ― one of the twin engines of growth along with private spending.
The uncertainties noticeably include slower-than-expected spillover effects of China’s reopening in the midst of its real estate crisis, persistent volatility in global oil prices due to the Russia-Ukraine war since last year, plus the Israel-Hamas war since this month.
Surging oil prices are adding upward pressure on inflation, which in turn can weigh on private spending that failed to sustain growth after a 0.5 percent increase in the first quarter of the year. It shrank by 0.1 percent in the April-June period.
“It should not be misunderstood that Korea’s economy will be on a recovery trajectory next year only because the growth rate will be up from the 1 percent-range to the 2 percent-range,” said Oh Hyun-hee, a research fellow at Hana Institute of Finance.
She was referring to multiple growth forecasts by financial institutions in and outside the country.
For instance, the Ministry of Economy and Finance, the Bank of Korea (BOK), and the International Monetary Fund (IMF) all estimated the 2023 growth outlook for Korea’s gross domestic product (GDP) at 1.4 percent.
The ministry expects the Korean economy to grow 2.4 percent in 2024, while the BOK and the IMF each forecast a 2.2 percent expansion.
Smoke rises following an Israeli airstrike in the Gaza Strip, as seen from southern Israel, Oct. 17. Analysts in Seoul say the Israel-Hamas war can heighten volatility in global oil prices, adding upward pressure on inflation in Korea. AP-Yonhap
“When comparing the annual growth rate with that from the previous year, Korea should be faring far better than 2 percent-range growth next year considering the pandemic was over in 2023,” the researcher said.
“In that regard, Korea can be said to be entering an indefinitely long period of low growth,” she added.
Joo Won, deputy director of the Hyundai Research Institute, voiced a similar view, pointing out that his institute's quarterly report for the July-September period said an L-shaped economic slump is likely and that hope for a U-shaped economic recovery will fade away if exports continue to struggle.
Korea's exports have been falling for the 12th straight month through September, although the pace of decline was the mildest ― down 4.4 percent year-on-year.
By sector, exports of semiconductors, the country's key export item, fell for the 14th month in a row, dropping 13.6 percent year-on-year to $9.94 billion in September on weakened demand and a drop in chip prices.
“It remains uncertain whether chip exports will bounce back,” Joo said, noting that China’s economy is faltering in an unprecedented manner following four decades of growth.
China accounted for 19.6 percent or $357.5 billion of Korea’s exports in the first half of 2023. The ratio was down compared to previous years, but it is still the highest among Seoul’s trading partners.
In particular, China was the destination for 45 percent of Korea’s memory chips exported in the January-July period, which was worth $25 billion.
Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI), assessed the Israel-Hamas war can weigh on both exports and private spending if the conflict spreads to the rest of the Middle East.
“The higher oil prices go up, the more it will cost to manufacture goods, both for overseas and domestic sales,” Lee said. “Korean exports thus will be less cost-competitive, while consumers here may find it tougher to buy goods due to price hikes.”
Concerning Korea's growth potential compared to other countries in 2023, Lee said it “should not be overlooked” that the IMF’s projected growth for Korea of 1.4 percent is lower than Japan’s 2 percent.
It will be the first time in 25 years that Japan is set to surpass Korea in terms of economic growth.
Lee pointed out that Japan’s economy is the third-largest in the world, compared to Korea’s, which ranks 14th.
“A country with a smaller economy usually has higher growth potential, and the fact that Korea will fall behind Japan suggests its economy has serious shortcomings when it comes to long-term growth,” he said.
Meanwhile, Finance Minister Choo Kyung-ho maintained his view that Korea’s economy will rebound as early as October.