The winds of change are blowing in the Korean economy. The Bank of Korea (BOK) convened its Monetary Policy Board meeting on April 13th and revised up the nation’s growth forecast for this year. It’s the first time since April 2014 that the BOK has increased its growth forecast. What does the BOK’s revision mean for the Korean economy? We will find out more details with Konkuk University’s School of Economics professor Choi Bae-geun.
In January this year, the Bank of Korea forecast the nation’s gross domestic product would grow by 2.5 percent. But on April 13th, the Bank of Korea convened April’s Monetary Policy Board meeting and revised up the growth forecast by 0.1 percent. So, it announced that the nation’s growth forecast for this year is expected to be 2.6 percent. The reason behind the announcement is that, despite sluggish consumption, exports have been faring better than expected, contributing to increased production and investment in facilities. These factors have all contributed to the 0.1 percent hike.
A growth forecast hike by the BOK is a rare event. As the world economy has been stagnant for quite some time, the BOK has been revising down its growth forecast for the past few years. However, things were different on April 13th. The key interest rate was kept steady after falling 0.25 percent in June last year, but the nation’s growth forecast was revised up to 2.6 percent. This represented a 0.1 percent increase in just three months from January’s forecast of 2.5 percent. The upward revision was made largely due to a recovery in exports.
A large increase in exports of semiconductors and petrochemicals became the driving force behind the increased growth projection. Semiconductors in particular are expected to be in demand, with sales forecast to increase by 7.2 percent this year. The increased demand for semiconductors stems from industries related to the 4th Industrial Revolution. For example, demand from AI, IoT, and driverless car technology and other related industries has increased, as well as investment in these industries, which is contributing to the increased demand for semiconductors.
As of March this year, Korea’s exports have increased for five consecutive months. In the last three months, semiconductors and petrochemicals have especially been showing signs of vitality, increasing by double digit figures. As exports have been stretching their wings, investment in corporate facilities has also been on the rise. Facility investment is expected to grow by 6.3 percent this year following on from last year’s fall of 2.3 percent. Figures for consumer sentiment and employment have been on the rise as well. The consumer sentiment index that had hit rock bottom due to the prolonged financial downturn has been on an upward curve for the past two months, and employment figures are also improving as 470,000 more people were hired in March. However, it is still too early to talk of a full recovery.
If you look at exports currently leading growth, the figures for March show exports reaching US$48.9 billion. However, the export amount in March 2014 was US$49.1 billion. So, we still haven’t recovered the export level from 2014. Because we’ve seen such massive losses in the past two years, the base effect is making the current export figures seem bigger than they really are. Also, they say that listed companies are recording their best performances ever, but the problem is that their sales are stagnating or declining despite a rise in operating profit. In other words, firms did not see a rise in income while their profits increased. This means that they were cutting costs through company restructuring or reducing their workforce and this led to their profits. Another point they make is that retail sales also grew by 23.4%, and that it grew 3.2% in March from the previous month. This may seem like it’s a big increase, but the figure does not mean much because it has been decreasing since October of last year and just turned over to the positive. We can’t expect our economy to recover with just a short-lived surge in exports.
Exports are steadily rising and listed companies are expected to record their best performance in the first quarter of this year. However, it is too early to think the Korean economy has fully recovered. Korean exports are heavily reliant on mainstream industries such as semiconductors and displays, while the aftermath of Daewoo Shipbuilding and Marine Engineering’s restructuring and a surge in household debt are expected to become a burden on domestic consumption. In addition, the possibility of North Korea’s 6th nuclear test and the intensifying rumors that a crisis is looming on the Korean Peninsula in April are new threats to the Korean economy.
North Korea has many anniversaries coming up in April. If it decides to conduct a nuclear or missile test to mark those anniversaries, Trump has said the US will not rule out military options, so tension has been growing on the Korean peninsula and this is all happening in the absence of a permanent head of state in South Korea. That is why people are using the term “Korea Passing”, as Korea is being bypassed while discussions are being made on international affairs surrounding the Korean Peninsula. It’s quite worrisome to think that affairs that could decide the fate of the nation could be decided without the relevant country’s consent. This is why until the end of April or until early May when the new administration takes office, security risks will continue to suppress the market. If North Korea decides to go ahead with a nuclear test at this time, it would exacerbate the situation.
The external situation surrounding the Korean economy is looking uncertain. Trump has been increasing calls for trade protectionism while other global adversities such as a currency war between the US and China, or calls for a renegotiation of the Korea-US Free Trade Agreement, could happen at any point. In these challenging times, Korea’s economy could be hit even harder if China’s economic retaliation to the deployment of THAAD intensifies. The BOK expects the nation’s growth forecast to decrease 0.2 percent if China’s economic retaliation continues for a year. Although the economy is showing signs of recovery, it is still too early to rest assured. So how can Korea go about creating a more robust economy?
Korea’s semiconductor industry is leading the world. However, semiconductors became Korea’s #1 export in 1995. So, for the past 22 years Korea’s main export businesses have not changed. What that means is Korea has failed to bring changes to its industry structure. In other words, for the past 20 years, Korea has failed to bring about considerable results in reorganizing its industrial system. That is why I believe that creating new profitable businesses in addition to the manufacturing business will allow us to maintain export competitiveness and go further to create competitive jobs. This is an issue that must be resolved institutionally.
The revival of exports and economic indices is welcome news. However, as the current positive trend has a limited impact on the economy, there must be increased efforts for the reorganization of the industrial system to provide an important turning point for the Korean economy.