Hyundai Economic Research Institute: "Korean Economy in Typical Recession Phase... Concerns Over Long-Term 'High-Low' Stagnation"

The Hyundai Research Institute evaluated that South Korea's economy has entered a typical 'recession' phase where both domestic demand and exports are simultaneously contracting. It forecasted concerns about the possibility of a long-term 'L-shaped' stagnation if an early recovery in exports proves difficult.

[Image source=Yonhap News]

In a report titled "Urgent Need to Secure Momentum for Economic Recovery to Enhance the Possibility of a Low-High Pattern," released on the 3rd, the Hyundai Research Institute assessed that the second-quarter economic growth rate (0.6% quarter-on-quarter) was effectively negative growth due to a decline in imports. All demand sectors, including private consumption (-0.1%), construction investment (-0.3%), facility investment (-0.2%), and exports (-1.8%), decreased, but the larger drop in imports (-4.2%) offset these declines, preventing negative growth.

The institute judged that although there was a temporary consumption slump due to concentrated heavy rains in summer, the demand decreased more sharply than expected, indicating strong psychological and economic factors at play. Retail sales in July fell by 3.2% compared to the previous month, marking the largest decline in three years since July 2020 (-4.6%), when the COVID-19 crisis began.

Moreover, amid deteriorating investment sentiment caused by high inflation and high interest rates, both domestic demand and exports contracted simultaneously, leading facility investment in July to drop by 8.9% month-on-month?the largest decline in 11 years and 4 months.

Construction orders, which forecast future construction market conditions, also fell sharply by 55.3% year-on-year in July, marking the largest decrease in 12 years and 9 months.

Regarding exports, the decline in semiconductor items was particularly notable in exports to China. August exports decreased by 8.4% year-on-year, marking the 11th consecutive month of decline since October last year. Exports to China in August fell by 19.9%, continuing a 15-month consecutive decline, with the key item, semiconductors, dropping by 20.6%, recording negative growth for 13 consecutive months since August 2020.

The institute forecasted that the coincident index cyclical component, which reflects the current economic situation, rebounded from a low of 99.3 in January this year until May but started declining again from June, suggesting the possibility of a delayed economic bottom. It diagnosed that in the third quarter, the Korean economy is in a typical recession phase with both exports and domestic demand sluggish due to weak exports to China and semiconductors and weakened real purchasing power caused by high inflation.

Accordingly, the initially expected possibility of economic recovery in the second half of the year is gradually weakening, and if the export economy does not recover, the 'L-shaped' long-term stagnation scenario (low-high-low) could materialize.

However, the institute added that while a 'statistical low-high-low' pattern?where the second half's economic growth rate is higher than the first half due to the base effect from last year's second-half slump?is possible, the economic conditions felt by households and businesses may differ.

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