Value context and insight. lkm@koreatimes.co.kr
INTERVIEW Korea's growth faces strong headwind
Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research
By Lee Kyung-min
This is the second in a series of interviews with global economists to see how the ongoing trade disputes will unfold and to analyze their implications for the Korean economy ― ED.
By Lee Kyung-min
Korea will see its economic growth “decelerate” sharply this year in the aftermath of ongoing trade disputes ― the trade war between the U.S. and China and the trade feud between Korea and Japan ― a Hong Kong-based global economist forecast, Monday.
She called for the Korean government to implement supplementary budgets as soon as possible and expand investment for the development of local materials to minimize the potential impact of the trade disputes.
“Cyclically, the deceleration of China, already lengthened semiconductor replacement cycle and Korea-Japan trade feud are all posing headwinds to its economic growth,” Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, told The Korea Times.
“Korea is expected to see the trade sector remaining under pressure on the back of subdued global demand, slowdown in tech cycle and the trade feud with Japan. We expect growth deceleration in 2019.”
She believes the Korea-Japan trade feud will take a greater toll than initially anticipated because the time-consuming, costly process will not likely see an immediate breakthrough.
“As Korea is highly dependent on Japanese import of the key inputs and Japan dominates in both market share as well as state-of-the-art technology, we expect Korean firms to have a hard time finding alternative supply. This substitution not only takes time but may also push up the price, eroding the profit margin for Korean manufacturers,” she said.
It remains to be seen how the issue will unfold, as Japan granted its first approval for high-tech material to Korea, Thursday, the first since the start of the trade feud.
In order to target weakness in domestic demand and export reliance on Japan, an economic stimulus package is in urgent need, she stressed.
“Pushing forward the 5.8 trillion won ($4.7 billion) supplementary budget and new investment in research and development (R&D) for local materials are the most pressing issues.”
Other than the emotionally charged conflict, Korea's export-dependent economy will be impacted by the ongoing U.S.-China trade war both directly from the deteriorating global demand, she noted.
“Korea is the most China-exposed country in the Asia-Pacific region. However, increasingly diversified investment globally by Korean firms and Bank of Korea's vigilant support through competitive exchange rates and low funding costs are expected to help,” she said.
The economist said it is unlikely that Korea will see foreign capital outflow, a constant fear among many emerging markets whose investment is heavily foreign-owned.
“Heightened uncertainty has shifted market risk appetite and investment into safety havens. However, as the market concerns over a currency war (between the U.S. and China) dissipate and China's growth prospects stabilize, we expect investors to continue investing in the emerging market,” she said.
However, the emerging market is still suffering due to overall weak investment sentiment influenced by deteriorating global risk appetite amid the continued U.S.-China trade war
“As preference shifts toward risk-off investments, trade war may place extra stress on emerging markets as well as economies with large external financing gap. Heightened trade tensions, especially after Chinese technology companies were involved, have disrupted global trade and technology supply chains,” she said.
Due to the negative mixture, the global economy will see a downturn much sooner than previously thought.
“As a result of worsening sentiment and sluggish trade performance, global demand remained subdued with investment slowing down in particular, posing headwinds for global growth momentum.”
Meanwhile, her assessment that the currency war between the world's two largest economies would stabilize rather than becoming a full-fledged currency war is based on the “reality” that both sides will stand to lose more than to gain.
“Despite market concerns on massive depreciation, the recent Chinese currency yuan breaking '7' is largely consistent with the Chinese central bank's long-standing position to increase two-way volatility,” she said.
This is because as China's current strategy focusing on growth stimulus and hedging downside risks, major side effects for massive depreciation ― suppressing investment demand, increasing external debt burden and encouraging capital flight ― are expected to prevent the People's Bank of China (PBoC) from a full-fledged currency war.
“For the US, as the super-cycle is heading towards a turning point, aggressive and competitive devaluation is expected to do more harm than good,” she added.