It seems that the South Korean economy, which already went through a lot of difficulties in 2016, will have to face even more challenges this year. Domestic consumption, which bolstered what little growth last year, is predicted to fall due to negative consumer sentiments and exports are unlikely to be going as well as before although some positive growth is anticipated this year. Besides, uncertain external conditions are still lingering on.
Most economic organizations and experts are forecasting that the annual growth rate of the South Korean economy will fall short of 3% for the third consecutive year for the first time in history. The OECD and the Hyundai Research Institute recently mentioned 2.6% and the Korea Institute of Finance and the Korea Institute for Industrial Economics & Trade (KIET) recently suggested 2.5%. The most recent estimate is 2.2% for each of the LG Economic Research Institute and the Korea Economic Research Institute, 2.4% for the Korea Development Institute (KDI) and 2.8% in the case of the Bank of Korea. Late last year, the South Korean government adjusted its forecast downward from 3% to 2.6%.
This has to do with a rapid increase in household debt, which is negatively affecting consumption, and a decline in purchasing power attributable to rising oil prices. Consumer sentiments are not favorable as well due to economic uncertainties and political risks. The other negative factors include negative views on conglomerates, side effects of excessive short-term stimulus packages, defensive consumption in the ongoing economic recession and a variety of external uncertainties.
According to the KIET, domestic consumption, exports and imports are likely to show a growth of approximately 2%, 2.1% and 3.6% this year, respectively. Last year, exports fell 6.9% and imports fell 8.2%. “This year, South Korea’s export and import indices are likely to show some improvement on the base effect related to the degrowth for the two previous years,” the institute explained, adding, “Still, a recovery to the level reached in 2011 to 2014, when its size of trade exceeded US$1 trillion, is unlikely to be achieved in 2017.”
The 12 major industries of the country have to deal with mounting trade protectionism and external economic uncertainties although the size of international trade is expected to increase based on a slight growth of emerging and advanced economies. Among the 12, information and communication technology (ICT), automobile, petrochemical, oil refining, semiconductor, display and general machinery are expected to show some positive growth this year thanks to an increase in export, recovery of global trade and rise in oil prices.
Specifically, the increase in annual export from the oil refining industry is estimated at 10.7%, petrochemical at 5.5%, information and communication equipment at 4.5%, food and beverage at 4.4%, semiconductor at 4.3%, display at 2.5% and general machinery at 2.0%. Those from steel and textile are estimated at 0.7% and 0.5%, respectively. In the meantime, the annual export from the shipbuilding industry is forecast to fall 13.1%, after an 11.8% decline in the previous year, and those from the automobile and consumer electronics sectors are predicted to decrease 0.8% and 5.0%.
The South Korean economy is currently exposed to various risk factors as mentioned above, including the impact of the Choi Soon-sil scandal. Until the final decision on the impeachment of President Park Geun-hye, confusion in state affairs and mounting economic uncertainties attributable to the lack of control are likely to continue.
Those risk factors also include G2 risks. At this moment, global trade environments are deteriorating as U.S. President Donald Trump is adhering to America First and trade protectionism, which is extremely fatal against small open economies relying heavily on export such as South Korea. Impacts of interest rate hikes by the Fed cannot be ignored, either.
Yet another concern is China’s economic retaliation against the South Korean government’s decision on THAAD deployment in South Korea. It has already taken the form of a ban on the sale of South Korean commercial and cultural products in China, tax inspections on Lotte Group subsidiaries and stores in China, stricter certification regulations on electric vehicle batteries and anti-dumping probes into polysilicon imported from South Korea. The slowdown of the Chinese economy is a cause of worry, too.
Under the circumstances, the KDI is calling for finance to have a bigger role this year while claiming that the government needs to prepare a supplementary budget and cut the key interest rate in the first half of this year. The bigger role of finance is being demanded by the IMF and the OECD as well. IMF chief Christine Lagarde recently warned against anti-globalization and trade protectionism, calling for countries with financial room to step up to bolster the world economy.
The OECD also advocated the necessity of aggressive financial policy in the interest of better total demand management while mentioning the Choi Soon-sil scandal and the Kim Young-ran Act as two of the downside risks the South Korean economy is facing. The implication of its remark is that the South Korean government needs to make good use of finance with political uncertainties threatening the economy.