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[KH Explains] Korea’s economic recovery slower than hoped

Experts still pin hopes on China’s reopening, recovery in global chip market

By Im Eun-byel

Published : July 2, 2023 - 16:16

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Passersby walk past Gwanghwamun in central Seoul amid heavy rain on Thursday. (Yonhap) Passersby walk past Gwanghwamun in central Seoul amid heavy rain on Thursday. (Yonhap)

Though Korea’s sluggish economy was initially expected to improve in the latter half of the year, the recovery is slowing, as the country struggles with a prolonged export slump.

The Finance Ministry is likely to lower slightly the economic growth rate forecast for 2023 from the previous 1.6 percent when it announces economic policy measures for the second half of the year on Tuesday.

The Korean economy was initially expected to rebound in mid-2023 when China’s economy reopened and the global chip market recovered, but major institutions both inside and out of Korea have pulled down their growth projections for Korea in recent months.

In May, the Bank of Korea cut its growth forecast from 1.6 percent to 1.4 percent, while state-run think tank Korea Development Institute cut its initial projection by 0.3 percentage point to 1.5 percent.

Though international institutions suggest the global economy will improve this year, their expectations for Korea are more gloomy.

The Organization for Economic Cooperation and Development pulled down its economic growth projection for Korea from 1.6 percent to 1.5 percent, while lifting its forecast for global growth by 0.1 percentage point to 2.7 percent last month.

The International Monetary Fund also brought down its economic growth forecast for Korea by 0.2 percentage point to 1.5 percent, while projecting the Asian region to grow by 4.6 percent -- a 0.3 percentage point increase from its previous projection.

A major setback for the Korean economy this year has been the trade deficit with China. Though exports to China were expected to improve earlier this year as China reopened, Korea recorded more than a year of trade deficits until April.

Korea’s exports to China in the first five months of 2023 was at $49.7 billion, falling 27.3 percent from the $68.4 billion in the same period last year.

“With the recovery of the Chinese economy being slower than expected, Korea’s exports to China have been unable to rebound,” said Ju Won, deputy director of the Hyundai Research Institute.

“The local semiconductor industry’s biggest market is China. The Chinese market has to recover in order for the Korean economy to find recovery momentum,” Ju said.

Another hurdle for Korea is high inflation and high interest rates. Though inflation in Korea peaked last year and the BOK has kept the interest rate unchanged at 3.5 percent in recent months, the domestic economy remains sluggish.

“The weakened real purchasing power due to the high interest rates and inflation from last year could limit the recovery of domestic demand,” the Hyundai Research Institute said through a report issued on June 13.

“The escalated uncertainty in the latter half of the year will increase the burden on households, leading to a decline in household consumption ability,” the report suggested.

The high interest rate could trigger a household debt crisis. According to the Global Debt report by the Institute of International Finance last month, Korea's household debt-to-gross domestic product ratio stood at 102.2 percent in the first quarter, the highest among the world's top 34 economies.

Yet, the central bank cannot easily cut the rate as inflation remains high. Though the headline inflation rate eased to 3.3 percent in May, core inflation was slower to ease off, standing at 3.9 percent.

But experts shared the view that the Korean economy has passed its worst dip.

Figures suggest a slow recovery of Korean exports. According to the Trade Ministry on Saturday, Korea posted a trade surplus of $1.13 billion in June, marking an end of 15-month streak of deficits.

“As it is assessed the semiconductor industry has hit the bottom, a turnaround will come soon,” Jung Kyu-chul, a researcher at the KDI, said. "The export slump will end, leading the economic recovery of Korea this year."