Germany's embattled economy raises concerns for Korea
Containers are unloaded from cranes at a port in Busan, Sept. 1. The Korean economy managed to grow for two straight quarters through the April-June period, after declining in the fourth quarter of 2022. Yonhap
China-based export reliance is among shared economic risks faced by Seoul, Berlin
By Yi Whan-woo
Germany's faltering economy is heightening anxieties that Korea may face similar troubles, as the two countries, despite the differences in size and economic outlooks, have multiple similarities when it comes to growth risks.
Germany is the only G7 economy that the International Monetary Fund (IMF) forecasts to contract this year after its gross domestic product (GDP) totaled $4.07 trillion in 2022 ― the fourth-largest in the world after the United States, China and Japan.
Its GDP is anticipated to shrink by 0.3 percent for the whole of 2023.
Accordingly, its economy stagnated at zero percent in the second quarter of the year, after declining 0.4 percent in the fourth quarter of 2022 and again 0.1 percent three months later, data from the German Federal Statistical Office showed.
The back-to-back economic contractions still put Germany at risk of recession after serving as the engine of the eurozone.
Regarding Korea, it avoided slipping into recession, as its GDP, after retreating 0.3 percent in the final three months of 2022, grew 0.3 percent in the first quarter this year and then 0.6 percent in the second quarter, Bank of Korea (BOK) data showed.
Its 2023 GDP, according to both the IMF and the BOK, is forecast to go up 1.4 percent, after amounting to $1.66 trillion last year as the world's 13th-largest economy.
Volkswagen employees work on an electric car assembly line at the Volkswagen (VW) vehicle factory in Zwickau, Germany, in this 2022 April file photo. EPA-Yonhap
The positive growth outlook for Korea compared to Germany's negative growth projection, however, “should not be mistakenly perceived as if Korea is faring better than Germany,” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).
Of the shared economic risks, Lee pointed out that both countries are export powerhouses and their reliance on China may slow their growth potential further.
After decades of development, a real estate crash and deflation among other risks are casting shadows on the future of the Chinese economy.
Under the circumstances, Korea has the world's highest level of export dependence on China, accounting for 22.8 percent of its outbound shipments in 2022.
The rate was even lowered from a range of 25 percent in recent years.
Meanwhile, the share of Germany's exports going to China has also been declining ― from 7.5 percent in 2021 to 6.8 percent in 2022.
But even so, China remained as Germany's fourth-biggest export destination in 2022 after the U.S., France and the Netherlands.
“It can be said that Germany's embattled economy is affected by trade relations with China, and in that regard, we should be prepared for a negative impact on our exports in the midst of China's economic crisis,” Lee said.
Heavy dependence on specific industries was another economic risk shared by Korea and Germany as pointed out by the experts.
They noted that such dependence can make it difficult for countries to act agile and keep up with new technologies in the midst of a rapid technological transition and blurred boundaries across businesses.
“For instance, the German auto industry excelled in combustion engines but that does not mean it will take the lead in electric vehicles (EVs), automotive driving or other forms of future mobility,” Korea Institute for International Economic Policy (KIEP) researcher Lee Hyun-jin said. “A failure to make a successful transition will be fatal as several industries are linked to one another.”
Concerning Korea, the researcher said it should “divert away from an excessive reliance on semiconductors considering chips are becoming a matter of national security at a time of intensified U.S.-China rivalry.”
In the long term, economists warn that the shrinking population and workforce as witnessed in Germany can also haunt the Korean economy.
U.N. data shows the median age of the population in Germany was 44.9 years in 2020, meaning that half the German population was younger than that and the other half older.
In the same year, the median age of the population in Korea was 42.7 years, the same as the average of the G7 member states.
“But the case will get more serious for Korea,” said Yoo Hae-mi, a researcher at the Korea Institute of Child Care and Education, noting that Korea struggles with the world's lowest fertility rate of 0.78, compared to Germany's 1.46, as of 2022.
The number of Korean citizens aged 60 or older increased by 5 percent on average from 2018 to 2022, surpassing the 1.8 percent average of G7 countries.
While both Korea and Germany are pushing to bring in more immigrants to cope with their aging populations, Korea is only in its nascent stages of setting up a governing body to oversee long-term immigration policies.
“Given the fact that Germany is steps ahead of us on immigration policy and still struggles with an economic slump, we should learn from its policies thoroughly and counter population-related economic risks,” Yoo said.