Korean economy faces rocky path to recovery

Xu Xiao Chun of Moody's Analytics

By Lee Kyung-min

The Korean economy is facing a rocky path to recovery due to sluggish domestic demand and exports amid lingering global uncertainties involving the U.S-China trade dispute, according to global economists, Sunday.

They expect the economy may see a mild turnaround in the short term, mostly because of “base effects” from a shocking contraction in the first quarter, but they said a rebound will not be sustainable citing multiple downside risks.

The downbeat view came after Asia's fourth-largest economy contracted 0.3 percent unexpectedly in the first quarter from the quarter before, the worst performance since the 2008 global financial crisis, which is now sending a shudder through the local stock and currency markets.

“There is an abundance of downside risks and uncertainties yet to be resolved regarding external demand conditions and the domestic employment market, and thus our expectations of the broader economy must be tempered in the near term,” Xu Xiao Chun of Moody's Analytics told The Korea Times.

“Facility investments in particular remained worryingly weak. Exports have fallen amid the trade dispute and cooling demand for electronic goods and components.”

Facility investments declined 10.8 percent between January and March from the final quarter of 2018, the sharpest fall in 21 years.

Of the January-March growth data, the most notable aspect was that exports to China ― Korea's top export destination ― have continued to fall significantly, Xu said.

“Semiconductor exports, normally a top earner, have also seen consecutive falls. The government consumption was not able to prop up the economy like the fourth quarter in 2018,” he said.

Fitch Ratings' Jeremy Zook

A similar assessment was made by Fitch Ratings' Jeremy Zook.

“Korea's deceleration in growth momentum was driven by slowing global economy and weak investment, culminating in the 0.3 percent contraction in GDP for the first quarter of 2019, increasing downside risks to our current 2019 GDP growth forecast of 2.5 percent,” he said.

The agency's forecast of 2.5 percent growth in 2020 also reflects the slower pace expected down the road.

“We expect underlying growth performance to be firm, though at a slower pace relative to recent years,” he said.

Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, agreed, expecting that such heightened external uncertainties will continue to bog down Korea's growth, as with most Asian countries.

“The deceleration of China, international trade tension and lengthened semiconductor replacement cycle are all posing headwinds to its economic growth,” she said.

Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research

China, biggest downside risk

The economists said the recent re-escalation of the U.S.-China trade dispute poses some possible downside risks to Korea's economic outlook.

“Heavily exposed to international trade uncertainties and the cyclical slowdown in semiconductors, the external sector of Korea will require additional help and time to recover. It may need some time for Korea to see improvements,” Garcia-Herrero said.

More patience may be needed in 2019 before a full-fledged recovery, she noted, given a more accommodative fiscal and monetary policy stance is also expected to boost domestic employment and investment, which requires time to transmit through the economy.

In her view, Korea's economic recovery will be affected by how China's stimulus will phase into effect.

“We expect extra time before Chinese domestic demand picks up and lends support to Korea, given further slips in domestic consumption and private investment in China,” she said.

Similarly, Xu views the trade spat between the world's two largest economies will be a major determinant in Korea's growth outlook.

“A successful trade deal between U.S.-China, as with a lot of the countries in the Asia-Pacific region, would provide a major turnaround for trade as well as domestic growth,” he said.

But the impact may be short-lived given China was already slowing down prior to the trade war.

“The trade spat and China's downswing in the tech cycle was always going to drag growth down anyway. So the long-term future growth will have downside risks even if the short-term problems are resolved.”

Structural problems pose greater headwinds to the export-reliant country, highly vulnerable to uncontrollable external factors.

“Aging population, climbing household leverage and deteriorating labor market conditions collectively exert downward pressure on domestic demand and upward pressure on wage costs,” Garcia-Herrero added.

The two issues will pose long-term challenges to Korea, according to Zook.

“Economic and governance reforms that spur productivity growth and increase transparency would enhance Korea's macroeconomic outlook and could be positive for its credit rating,” he said.

Antonio Fatas, an economics professor at INSEAD

Mild recovery expected in Q2

Some economists said that there are indications that Korea's growth to bounce back in the coming quarters, an inevitable turn of events given the first quarter contraction.

“All other variables point towards a recovery to positive growth rates in the second quarter and overall positive growth for 2019 even if it is lower than what we thought a quarter ago,” Antonio Fatas, an economics professor at INSEAD said.

“The partial recovery in the global economy including China will help.”

Jeremy Zook of Fitch Ratings agreed.

“Exports, led by semiconductors, have rebounded in the past two months through April, while retail sales jumped in March. The government's expansionary fiscal policy, including the recently proposed 6.7 trillion won ($5.7 billion) supplementary budget, provides some further support to the growth outlook.”