South Korean economy shrinks for first time in 2 years
South Korea’s economy is expected to record a quarterly contraction for the first time in two years, according to preliminary estimates by the Bank of Korea. This economic shrinkage may prompt policymakers to stop raising interest rates.
Rhee Chang-yong, the central bank governor, signalled the likelihood of a contraction earlier this month when he announced a quarter-point increase in interest rates. Markets interpreted the raise as the last step in the current tightening cycle, given the recent weakness in economic growth.
According to a preliminary estimate by the central bank, gross domestic product fell by 0.4% in the last three months of 2022 compared with the previous quarter. The contraction reflected declines in two engines of growth — private spending and exports — amid a global economic slowdown.
For the full year of 2022, GDP growth is expected to come in at 2.6% when official figures are released later in February.
The central bank said GDP declined in the fourth quarter because private consumption fell by 0.4%, alongside a 4.1% drop in manufacturing, and exports dropped by 5.6% due to falling demand for Korea’s key export items, such as semiconductors and chemical products.
Korea is also vulnerable to fluctuations in global commodity prices as it relies heavily on imports of oil and food. As interest rates climb worldwide, companies are slowing or ceasing new investment, leading to a reduction in demand for Korean products such as semiconductors, steel and displays.
If the economy contracts again in the first quarter of 2023, South Korea will enter a technical recession. However, there is a possibility that first-quarter GDP will rebound due to China’s reopening.
Help from China
Goohoon Kwon, senior Asia economist at Goldman Sachs, believes South Korea will benefit from the reopened Chinese economy. Renewed activity in China should help ease the supply disruptions that have persisted since November, which considerably reduced demand for chips and electronic components and should be remedied moving forward.
In addition, he anticipates that South Korea’s economy will expand in the first quarter from front-loading of fiscal spending in China as well as domestically, while the cycle of local interest rate hikes is about to come to an end.
In terms of interest rates, as the outlook darkens, the BoK is winding down its 18-month tight-ening cycle. The central bank made two half-point increases last year as part of its effort to keep up with the aggressive tightening by the US Federal Reserve. There won’t be any additional rate increases this year, according to the economists surveyed.
Higher rates have strained Korea’s credit markets and a rare default by the local developer of Legoland Korea sent the corporate bond market tumbling last year. Deteriorating sentiment in property markets as house prices fall is another concern for policymakers.
Support for exporters to boost economy
After South Korea reported its first economic downturn in two and a half years, primarily as a result of the decline in exports, and worries about a recession are growing, the government has made robust support for exporters a top priority.
The government will focus policy resources on reactivating exports and investment, such as pushing ahead with deregulation efforts and offering tax and financial support to boost the key export sector.
Meanwhile, the Chinese economic slowdown that notably affected Korean exports last year should be relieved as a result of the reopening by Beijing. However, there are some concerns about the potential impact of growing US curbs on China over semiconductor exports, because Korean companies have large chipmaking facilities in China. Sources: https://www.koreatimes.co.kr/www/biz/2023/ 01/488_344250.html https://www.cnbc.com/2023/01/26/south-koreaseconomy-growth-expected-from-china.html https://www.reuters.com/markets/asia/south-korean-economy-shrinks-q4-first-time-2-12-years-202301-25/ https://www.bloomberg.com/news/articles/202301-25/south-korea-s-economy-contractsas-exports-fall-rates-rise#xj4y7vzkg