Weaker US growth to hurt Korean intermediate goods exporters: BOK

gettyimagesbank

Korea’s exports of U.S.-bound intermediate goods, including steel, chemical and petroleum products, will decline in the event of a weaker-than-expected growth of the world’s largest economy, a central bank report said Friday.

Advancing the pessimism is the increasing dependence of Korean exports on U.S. consumer sentiment over the past four years. This trend stems from strengthened economic ties, as evidenced by the steady rise in foreign direct investment and trading volume between the two countries.

However, the slowdown in the three sectors can be offset in part by robust outbound shipments of Korean automobiles and machinery — two strong export drivers increasingly insulated from economic uncertainties. Their resilience is underpinned by high product quality, as illustrated by a growing number of favorable consumer reviews and expanded market share since 2018.

Bank of Korea headquarters in Seoul / Courtesy of Bank of Korea

“Exports of Korean goods to the U.S. have been on the rise, but so has the risk,” the report said.

Softer-than-expected August manufacturing and jobs data heightened concerns about a potential slowdown in the U.S., increasing the risk of spillover effects for export-oriented Korean manufacturers. 

The U.S. Bureau of Labor Statistics reported on Wednesday (local time) that the country added 818,000 fewer jobs than initially estimated from March 2023 to March 2024.

Many interpreted the retraction as a sign of slowing job growth, indicating a potential economic slowdown.

“Market watchers’ view of key economic indicators and datasets pointed to a potential sustained slowdown. This led to collective concerns of major Korean manufacturers subject to a greater risk exposure and U.S. consumer sentiment since 2020.”

The central bank data showed chemical products constituted 8.7 percent of Korea’s exports to the U.S., followed by steel (6.8 percent) and petroleum products (4.9 percent).

Nonetheless, manufacturers of high-tech green electric vehicles (EVs) and machinery are expected to remain strong.

“The growth of the two sectors are showing signs of decoupling from the U.S. market condition, aided further by its industrial policies. Exports overall will stay unaffected, provided that the U.S. economy does not experience a serious downturn.”

Among the risks undermining Korea’s export prospects are heavy import duties brought on by the potential election win of former U.S. President Donald Trump. Also on the list is the risk of an "EV chasm," a source of concern for vehicle manufacturers for an extended period.

Korean exporters should prepare response measures, the central bank recommended. 

“The implementation of about 40 percent of investments related to the Inflation Reduction Act and semiconductor legislations are delayed,” it said.

"Political uncertainties surrounding the U.S. presidential election continue to affect business planning. Hyundai and Kia's diversification into extended-range electric vehicles (EREVs) is an effective strategy to navigate the prolonged 'EV chasm.'" 

U.S. economic growth is expected to slow, constrained by weak consumer spending brought on and exacerbated by persistently high inflation and borrowing costs.

However, the fear of recession in the near term is limited, buffered by artificial intelligence-related investments coupled with immigration, it said.