[Insight & Opinion] Why Even 1.5% Economic Growth Will Be Difficult This Year

Published 19 Apr.2023 13:18(KST)

Recently, downward revisions of South Korea's economic growth forecasts for this year have been announced one after another. The Bank of Korea lowered its forecast from 1.7% in November last year to 1.6% in February, and in April, it revised it again to slightly below 1.6%. The International Monetary Fund (IMF) projected South Korea's economic growth rate at 1.5% in its April World Economic Outlook, down 0.2 percentage points from the January forecast. The average growth forecast by eight global investment banks is only 1.1%.

The Bank of Korea's February forecast of 1.6% was based on growth contributions estimated at 1.3 percentage points from domestic demand and 0.3 percentage points from net exports. However, given the current economic trends, even the 1.3 percentage points from domestic demand seems overly optimistic. A more serious issue lies in the 0.3 percentage points estimate from net exports. Last year, despite a current account surplus of $29.8 billion, the growth contribution from net exports was minus 0.1%. From January to February this year, the current account recorded a deficit of $4.7 billion. The trade balance from January to March has already shown a deficit of $22.4 billion. Even if exports improve in the second half of the year, realizing a current account surplus is becoming uncertain. Therefore, the 0.3 percentage points growth contribution estimate from net exports is overly optimistic and suggests that this year’s growth rate may fall short of 1.5%.

The recovery of the global export market this year is delayed more than expected. According to the S&P Global Purchasing Managers' Index (PMI), manufacturing in advanced countries is still stuck in a recession phase. The effects of China’s economic reopening have yet to appear. The World Trade Organization (WTO) announced that global trade growth will decline from 2.7% last year to 1.7% this year. The possibility that export improvements in the second half will be weaker than expected is increasing.

More attention should be paid to the reasons behind the growth rate falling below 1.5% than to the fact itself. The low growth rate of our economy is due to domestic demand stagnation caused by high interest rates and the reduction or possible deficit in the current account surplus. In particular, the trade balance with China has recorded deficits for six consecutive months through March. This is because exports to China, including semiconductors, have sharply decreased in both price and volume, while the prices of intermediate goods imported from China have risen and their volume has also increased. If this phenomenon is a short-term effect caused by the decline in semiconductor prices, it is not a major problem.

Although semiconductor prices are expected to recover, the noteworthy fact is that structural changes are underway in the trade structure between South Korea and China. Intermediate goods account for 80% of South Korea’s exports to China, and 80% of those are used in China’s domestic market. The core of this structural change is that as China’s technology improves and its self-sufficiency rate for intermediate goods rises, imports of intermediate goods from South Korea are decreasing. On the other hand, South Korea’s dependence on intermediate goods imports from China continues to increase.

Moreover, behind the changes in the trade structure between South Korea and China are shifts in the global supply chain landscape due to increased geopolitical risks and intensifying competition in technology security. Even if the global economy improves, the era of large-scale trade surpluses with China has ended, and the possibility of shifting to a deficit trend is becoming a concern. This means that South Korea’s current account surplus is likely to shrink significantly, and the growth contribution from net exports will decline.

The decline in this year’s growth rate is a warning alarm signaling that if the Korean economy does not properly respond to structural changes in the global trade market, it will fall into the quagmire of low growth in the 1% range.

Kim Dong-won, Former Visiting Professor at Korea University