Korea to Undergo U-Shaped Recession
By Kim Jae-kyoung
Staff Reporter
South Korea is expected to undergo a U-shaped recession, meaning that the economy will be at the bottom for a considerable period before it shows a meaningful recovery.
Economists and policymakers said that recent economic data is indicating that Asia's fourth-largest economy may have hit the bottom, but it is still unclear when it will bottom out due to its high dependence on overseas demand.
Korea Institute of Finance (KIF) economist Shin Yong-sang said that due to its export orientation, the Korean economy will not be able to rebound until other major economies get out of recession.
According to the Bank of Korea (BOK), Korea's exports accounted for 55 percent of its gross national income (GNI) in 2008, up 11.2 percentage points from the previous year, and well above Britain's 26.3 percent, Japan's 22 percent and the United States' 18.5 percent.
``With the economy relying heavily on overseas demand, it's impossible to see a full recovery without an increase in exports,'' Shin said. ``Given the global slump and sluggish exports, (Korea's) recession will likely continue for a while.''
He pointed out that the March trade surplus was not an outcome of rising export demand bolstered by global recovery, but a recessionary surplus caused by plunging imports.
``Stabilizing trends in industrial output and consumption are signals of the economy passing the worst, but they were mostly due to base effects from the prior month's poor performance,'' he said.
The nation's trade surplus reached a record high of $4.6 billion in March, the largest monthly surplus since $3.8 billion in April 1998. Exports amounted to $28.3 billion last month, down 21.2 percent from a year earlier, while imports plummeted 36 percent to $23.7 billion. Industrial production fell 10.3 percent in February year-on-year.
In its latest report, Standard Chartered analyst Nicholas Kwan wrote that the worst may be over, but it has a long way to go.
``The worst of times for Korea's external-payments stress may be over, but the road to recovery remains long. The stimulus package is encouraging, but it will take time to deliver results,'' he said.
``While this is no guarantee of economic health, it is a passport for the long journey toward recovery,'' he added.
BOK Governor Lee Seong-tae also hinted that the country will undergo a U-shaped recovery path. The central bank froze its key rate at the current level of 2 percent, Thursday, for the second consecutive month.
At a press conference following a monetary policy meeting Thursday, Lee said that although some data points to a slowing of the economic downturn, downside risks to growth remain high.
``The economy is unlikely to bottom out in the first half. GDP growth will be in negative territory this year, as exports are unlikely to turn around soon due to sluggish external demand,'' he said.
On Friday, the central bank forecast the economy to contract 2.4 percent this year, which would be the worst performance in 11 years.
It said that the economy will probably hit the bottom in the second or third quarter, but it's expected to recover very slowly and get better only after the second half of next year due to uncertainty about the global recession.
Shin of KIF warned that if the economy stays at the current bottom level for a prolonged period, it's highly probable that the economy will see another crisis in the second half and that the financial soundness of local lenders will be tested again.
``With economic recession extended, it's inevitable that financial services firms will see their profitability and financial health deteriorate,'' he said.
``The country should make more efforts to clear away market uncertainties through regular structuring and expand the social safety net to protect those who lose their jobs as a result of such restructuring,'' he added.