Weak exports deter economic recovery

By Choi Kyong-ae

Exports fell the most in nearly six years last month, fueling worries that declining global demand and the weakening yen could hamper Korea’s economic recovery.

Exports continued to drop in the past five months through May when shipments by Asia’s fourth-biggest economy fell 10.9 percent to $42.4 billion from a year earlier, the Ministry of Trade, Industry and Energy said in a statement.

Analysts expect exports to remain sluggish throughout the year not only because of temporary issues, but because of structural reasons. They said a meaningful recovery in consumption has yet to come.

“Declines in oil prices are the major temporary reason weighing down on exports. Declining demand from China and from around the world are the main structural reasons behind falling exports,” Shinhan KTB Futures analyst Jung Kyung-hee said Monday.

China is gradually increasing controls on the processing and trading of raw materials imported from Korea and other countries, as Asia’s fastest growing economy replaces some imported raw materials with its own, Jung explained.

“Moreover, China is rapidly catching up with Korea in some industry technologies. As a result, they import less from Korea and the trend will get stronger,” he said.

Analysts view weak exports as a major downside risk for the Korean economy as they more than offset a recent rebound in consumption.

Retail sales rose 1.6 percent month-on-month in April compared to the previous month’s 0.5 percent decline. Leisure and entertainment activity gained 11 percent last month after a 1.5 percent drop a month earlier, according to a Nomura report.

But, “the rebound was due to the positive base effect from the Sewol ferry disaster a year ago,” Kwon Young-sun, a Hong Kong-based Nomura economist, said in his recent research note. On April 16 of last year, the ferry sinking which claimed 304 lives ― most of them high school students on a field trip ― resulted in steep cuts in consumption.

Other economic data tell a different story about Korea’s economy.

The HSBC South Korea Purchasing Managers’ Index (PMI), which measures the health of the manufacturing sector, fell to 47.8 in May from 48.8 a month ago. It signals a faster rate of deterioration in operating conditions at Korean manufacturers. The latest figure was the lowest since August 2013, HSBC said Monday in a statement.

The business confidence index for the manufacturing sector fell to 77 in May from the previous month’s 80, the Nomura report showed.

The yen rose 12 percent in value against the won in the past year and Korean exporters such as Hyundai Motor and POSCO have been struggling with declining market share and profits in global markets.

Affected by growing downside risks, the Bank of Korea and the International Monetary Fund have recently revised down their growth outlook for Korea this year to 3.1 percent. Korea’s economy grew 3.3 percent last year.

At the end of June, the Ministry of Strategy and Finance is expected to cut its existing growth outlook of 3.8 percent for the country at the end of June, along with second round of stimulus packages.

The finance ministry announced a 41 trillion won (about $37 billion) stimulus program in August last year and the central bank has since cut its key rate three times to boost spending.

“The (Korean) government should employ extra stimulus measures including a BOK rate cut in June or July to mitigate downside risks to economic growth from sluggish exports and investments,” Citi Research analyst Chang Jae-chul said.