By Kim Jae-won
Is Korea Inc. buckling on the threshold of joining advanced economies?
A sense of crisis is creeping into major industries as they have difficulties finding a breakthrough. Many executives of major companies paint a bleak picture not only for their businesses but the economy as a whole.
Shipbuilding, steel, automobiles, electronics and ICT sectors -- the locomotives that have powered the nation’s economic growth -- are sputtering on fiercer competition from global rivals.
“It’s really worrying. Even Samsung Electronics and Hyundai Motor are losing market share and appear to be losing growth momentum,” an executive of a top chaebol said. “Worse, the outlook is far from bright. Concern is growing that we will be stuck in this slump for years -- similar to Japan’s lost decade.”
A recent OECD report said Korea’s growth potential -- the maximum growth rate a country can attain without fanning inflation -- will continue to fall to as low as 1.29 percent in 2060 from 3.66 percent in 2015.
On top of lackluster domestic consumption, exports, which have boosted growth in the past, are also losing steam. Exports dropped 5.1 percent to $268.7 billion from January to June, according to data from the Korea International Trade Association, a lobby group for local exporters.
According to Chaebol.com, an institute monitoring conglomerates’ business activities, sales of the nation’s top 10 conglomerates fell 4.6 percent, or 26.7 trillion won, to 546 trillion won last year. Samsung Electronics’ overseas sales dropped 13.2 percent to 122.5 trillion won.
Analysts say a fall in demand from China amid slowing economic growth will pose major risks to the Korean economy.
“The slowing economic growth in China will be one of the biggest negatives for the Korean economy,” said Korea Development Institute researcher Jung Kyu-chul.
"Weaker Chinese investment and consumption will negatively affect our economy.”
He said Asia’s fourth-largest economy was at a crossroad -- closely being trailed by China in technology, but failing to narrow the gap with Japan.
“Korea needs to develop and improve creative, higher-value-added products that followers cannot imitate easily,” Jung said.
Japanese companies, helped by a weaker yen, will also steal global market share from Korean rivals, analysts said.
Frederic Neumann, co-head of HSBC’s Asian Economic Research, said the main reason for the weak exports was unfavorable foreign exchange rates, which made Korean exports relatively expensive.
“The weak yen is starting to squeeze competitors in Korea, where growth had started to disappoint even before the respiratory syndrome scare,” said Neumann in a report.
Economists say Korean exporters are unlikely to pull themselves out of the slump by the end of this year, given low consumer sentiment in China, the U.S. and the EU, key destinations of Korean exports.
“Relatively better economic performance from the U.S. and EU are not translating to sustained improvement in consumer spending -- indeed, U.S. consumer sentiment tumbled in July,” said HSBC economist Joseph Incalcaterra. “This could imply further challenges for Korea’s export sectors.”
He said he was not expecting any rapid improvement in the second half of the year, especially as data from China pointed to sustained weakness.
To shore up the economy, Incalcaterra said the authorities needed to take more stimulus steps, including one more rate reduction.
“In the short-term, we think the authorities can do more to shore up demand,” he said.
“Now that the FSC has addressed household debt levels and inflation pressures have further subsided, we expect one more rate cut from the Bank of Korea before the end of the third quarter.”
However, analysts say genuine corporate restructuring, labor reforms and greater investments in R&D are urgent for companies to ride over challenges and sharpen their competitive edge.
Park Jae-ha, a senior researcher at the Korea Institute of Finance, said in a report that Korea was unlikely to fall into a deflationary trap as happened to Japan.
“To prevent our economy from slipping into a long slump, we should carry out drastic deregulation and corporate restructuring and make efforts to make our labor market more flexible,” Park said.
“At the same time, we must come up with measures to effectively address soaring household debt, the biggest problem for the nation’s economy.”