Government Gives Positive Assessment of Korean Economy... But Variables Like 'Exports, Monsoon, and COVID-19' Remain

Global Trade Still Contracted
Consumption May Shrink Again Due to Monsoon

September Exports Depend on Global Demand Recovery
"Semiconductor Demand Surge Temporary," Some Assess

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] Although the government has assessed that the economy is showing signs of recovery based on domestic demand indicators such as consumption, analysts say it is still too early to confidently claim that the economy, which was shocked by the novel coronavirus infection (COVID-19), has entered a recovery trend. The biggest variable is exports, which account for more than 40% of the Gross Domestic Product (GDP). While the government evaluated that the export slump is also easing, economic experts believe that since global trade itself has contracted, it will take time to return to pre-COVID-19 levels. Other unexpected variables include the possibility that record-breaking monsoon rains could shrink the recovered consumption again and the risk of a resurgence of COVID-19.

According to the Ministry of Economy and Finance, the Bank of Korea, and other related agencies on the 14th, these institutions are focusing on exports among the factors that will affect domestic GDP in the second half of the year. A government official said, "In May, as countries lifted lockdown measures, backlogged orders were processed, leading to some improvement in exports in July," adding, "From September, the results will depend on how quickly the contracted global demand recovers." A Bank of Korea official also said, "Until July, the year-on-year decline in exports narrowed, giving us confidence in recovery, but in early August, the figures were worse than expected, which was surprising," and added, "The exchange rate and domestic demand are not bad, but exports remain an unpredictable variable." Exports have decreased by double digits for three consecutive months since April. In July, the decline rate (-7.0%) narrowed to single digits, raising expectations, but in early August (1st to 10th), exports fell by 23.6% year-on-year.

There is also an assessment that semiconductor demand, which had increased during the early spread of COVID-19 due to the growth of the untact (contactless) industry, has decreased again. Professor Tae-yoon Sung of Yonsei University's Department of Economics said, "It is more accurate to say that export sluggishness continues because the improvement in exports is not significant," and added, "The recovery in semiconductor exports was a temporary phenomenon." In fact, last month, South Korea's export prices turned downward for the first time in three months. The export price index in July was 94.59, down 0.4% from the previous month, with notable weakness in semiconductor export prices such as DRAM (-6.4%) and flash memory (-5.2%). A Bank of Korea official explained, "In the second quarter, demand to stockpile semiconductors slowed down, leading to an expanded decline in semiconductor prices last month."

On the 9th, with the monsoon rain and Typhoon Jangmi No. 5 approaching, citizens holding umbrellas are hurrying across a crosswalk near Nowon Station in Seoul. Photo by Mun Ho-nam munonam@

South Korea's economy is highly dependent on exports, so growth rates are often influenced by exports. According to the Bank of Korea, Korea's goods and services exports account for about 41.0% of GDP, which is higher than the global average (30%) and countries like the United States (12%) and Japan (19%). Especially after the global financial crisis, the correlation between exports and growth rates has increased further. According to an analysis by the National Assembly Budget Office, the correlation coefficient, which was negative (-0.146) from 2001 to 2009, rose significantly to 0.787 from 2010 to 2019. The high dependence on the top 10 export items, such as semiconductors and automobiles, at 46.3% is also a concern.

Therefore, the government is making every effort to find a breakthrough for the export slump caused by the prolonged COVID-19 pandemic. The government announced that it will supply 4.6 trillion won in funds to key export-oriented service industries by 2023. It has selected content, medical and healthcare, edutech, digital services, fintech, and engineering as six promising K-services and plans to dramatically expand exports through customized support for each sector. A Bank of Korea official said, "The government's direction to support service exports because it cannot just wait for external conditions to improve is correct," but added, "How effectively the invested funds will work depends on the detailed plans."

This content was produced with the assistance of AI translation services.