Diverging Export Forecasts for Second Half of Year... Will Economic Growth Rate Be Revised Downward?

As exports, the backbone of the Korean economy, have been running a deficit for over a year, attention is focused on whether there will be a return to surplus in the second half of this year. The government expects the trade balance to gradually recover and anticipates that surplus improvement could be possible as early as the third quarter of this year. However, a state-run research institute has also forecast that export sluggishness will continue in the second half of this year due to increasing downside pressures on the global economic recovery.

According to the Ministry of Trade, Industry and Energy on the 4th, the trade balance recorded a deficit of 2.1 billion dollars in May. This marks the 15th consecutive month of deficits since March last year. Fortunately, the deficit size has decreased by over 10 billion dollars from 12.51 billion dollars in January this year to last month. The cumulative trade deficit for this year reached 27.346 billion dollars.

The government has focused on the fact that the trade deficit has gradually narrowed this year. The average daily export amount per month is recovering, and although trade with China continues to decline, positive signals have been detected, such as exports to China recovering to the 10 billion dollar range last month. Additionally, factors such as the semiconductor production cut effect and strong exports of automobiles are raising expectations for export recovery in the second half. Minister of Trade, Industry and Energy Lee Chang-yang forecasted, "Considering the recent trend of average daily exports and the increase in working days, we expect the trade balance to improve significantly in June."

On the other hand, some have cautioned against the government's rosy outlook. The Korea Institute for Industrial Economics and Trade, a state-run research institute, predicted in its economic and industrial outlook for the second half of 2023 that exports this year will decrease by 9.1% compared to the previous year, totaling 621.6 billion dollars. While the negative export growth rate is expected to narrow compared to the first half, export sluggishness is expected to persist long-term. The trade balance is also predicted to reach a deficit of 35.3 billion dollars this year, following last year's record deficit of 47.2 billion dollars.

The Korea Institute for Industrial Economics and Trade explained that the semiconductor industry recovery is not as significant as expected, and the effect of China's reopening is also minimal. They believe that without a recovery in the semiconductor industry, which accounts for about 20% of Korea's total exports, overall export improvement is impossible. In fact, due to continued sluggishness in the first quarter of this year, the combined semiconductor inventory of Samsung Electronics and SK Hynix has been estimated at 50 trillion won. To resolve this, additional momentum such as large-scale semiconductor clusters or expansion of the AI semiconductor market including Chat GPT is needed.

Is an Economic Hard Landing Imminent?

If Korea's export recession prolongs, there is also a forecast that the economic growth rate could be lower than initially expected. Earlier, the Bank of Korea already lowered its economic growth forecast for this year from 1.6% to 1.4%, and further downward revisions are anticipated.

The Hyundai Research Institute also analyzed in its report titled "Hard Landing Begins - Recent Economic Trends and Economic Assessment" that while consumption has recently played a supporting role in the Korean economy, the problem is that even consumption, which has been defending the economy, is shrinking, indicating that the hard landing phase of the Korean economy has begun.

The report analyzed future economic prospects with two scenarios: a recovery scenario (U-shaped, low-high-low) and a long-term stagnation scenario (L-shaped, low-high-low). The recovery scenario, where growth rates increase in the second half, assumes that exports rapidly improve and government policy responses that help activate the domestic economy accompany this, leading the economy into a recovery phase.

Conversely, the long-term stagnation scenario assumes that export recession continues in the second half or that consumption no longer serves as an economic safety net due to government policy failures. This would result in a severe economic downturn in the second half, causing the economy to remain in a prolonged recession through next year. Joo Won, head of economic research at Hyundai Research Institute, said, "To reduce the amplitude of the upcoming recession and shorten its duration, more active efforts to stimulate the economy are urgently needed."

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