Simultaneous Economic Contraction in Korea's Top 3 Export Destinations... Export Slump and Increased Current Account Volatility

US, China, and EU Experience First Simultaneous Economic Contraction Since Financial Crisis

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] With the growth of the United States, China, and the European Union (EU) all simultaneously slowing down, and the global IT industry declining more sharply than expected, South Korea's export downturn is expected to continue. It is also analyzed that the volatility of South Korea's current account balance will further increase due to the expanding export slowdown, rising overseas travel, and high external uncertainties.

On the 19th, the Bank of Korea stated in its report titled "Review of Future Export Conditions and Current Account Evaluation (BOK Issue Note)" that "regional economic fragmentation triggered by the pandemic and political conflicts, along with intensified trade regulations, will act as short- and long-term downside risks to exports."

Joo Uk, head of the International Trade Team at the Bank of Korea's Research Department, explained, "As the economies of the Big 3 export destinations for our economy (the US, China, and the EU) are contracting simultaneously for the first time since the global financial crisis (excluding the pandemic), exports are expected to remain sluggish. However, compared to major countries, our economy has a high dependence on energy imports, making it vulnerable to movements in the global energy market. Considering this, the current account balance is relatively stable."

According to the report, the correlation coefficient between South Korea's exports (by volume) and the GDP of major countries showed the highest correlation with China's economy among the major countries. By product category, non-IT sector exports showed a higher synchronicity with major countries' economies. Additionally, the IT sector tends to lead the global real economy, and the recent slowdown in the IT sector is likely to lead to a decline in non-IT product exports with a time lag, not only in semiconductors.

By region, exports to the US and EU, which have a high proportion of non-IT products such as consumer goods and capital goods, are expected to slow down mainly in cyclical items like steel, machinery, and chemical products due to the continued tightening policies of the US Federal Reserve (Fed) and the European Central Bank (ECB). Although some improvement in automobile exports is expected due to deferred demand caused by semiconductor supply disruptions and the rise in the won-dollar exchange rate, in the mid to long term, the US Inflation Reduction Act (IRA) will immediately exclude electric vehicles from tax credit eligibility, weakening price competitiveness. Therefore, a slowdown in electric vehicle exports to the US is likely to become visible within this year.

Regarding exports to China, economic factors such as China's weakening growth and the decline in the IT sector, combined with structural factors like China's technological advancement and shift to a domestic demand-driven growth structure, are expected to continue causing sluggishness centered on intermediate goods. However, as production costs rise in China, ASEAN countries are increasingly playing the role of production bases, and the expansion of exports to ASEAN is expected to partially offset the decline in exports to China.

Exports to the EU are expected to slow down due to weakened import demand in the EU, but the increase in eco-friendly related exports such as electric vehicles and liquefied natural gas (LNG) ships is expected to partially cushion this decline.

Joo said, "Recently, the current account has continued to show a trade deficit due to a sharp increase in energy imports, and the positive pandemic-related factors in transportation and travel have weakened, significantly reducing the surplus. With high external uncertainties, a period of high volatility is expected to continue for the time being." He emphasized, "To maintain the current account surplus trend, efforts are needed to strengthen export competitiveness, improve energy consumption efficiency, and enhance the competitiveness of service industries such as travel and content."

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