The Korean economy has wrapped the first half of 2017 with a positive outlook. Despite starting off the year under unfavorable political circumstances, uncertainties were reduced through the election of a new president, while exports picked up showing that the economy is on a recovery track. Let’s take a closer look at the Korean economy’s performance during the first half of this year with Kim Kwang-seok, an adjunct professor at Hanyang University.
The economy seems to be recovering. It hit a low with political uncertainties in the beginning of 2017, but we are seeing clear signs of the economy recovering from the middle of the year with exports, investments, and consumption all picking up. Major economic institutions, securities firms, and international economic institutions abroad have been upwardly adjusting Korea’s economic forecast. For example, Nomura Securities raised Korea’s growth rate from 2.4 percent to 2.7 percent, while the Korea Center for International Finance’s survey showed that 10 international investment banks raised the growth rate by 0.1 percentage points. The Bank of Korea also hinted at an upward adjustment of the rate, which shows that the Korean economy is showing signs of improvement.
The outlook for the Korean economy was bleak at the beginning of the year. With increased external risks such as strengthened trade protectionism around the world, an interest rate increase in the US, and a hard landing expected for the Chinese economy, along with internal factors such as the increased jobless rate, prices and sluggish domestic demand, the Korean economy’s growth forecast was expected to remain in the low 2 percent range. However, the Korean economy performed better than expected in the first half of this year. According to the OECD, Korea’s GDP grew 1.1 percent quarter-on-quarter, and 0.6 percentage points compared to the previous quarter. This was the second highest increase among G20 nations following Brazil. One of the reasons for the growth was strong exports.
Exports recorded negative growth for two consecutive years from 2015. Automobiles, steel, and semiconductors all showed negative growth. However, with the rising international oil prices in 2017, Korean exports started showing signs of recovery. In May this year, exports reached $45 billion, growing 13.4 percent compared to the same month last year. Export figures have been seeing a steady increase for seven consecutive months for the first time since December 2011. Nine areas have been performing especially well, including semiconductors and solid-state drives, which saw export figures reaching a record-high. Exports for most regions around the world excluding the US and the Middle East have sharply increased, helping the economy to recover as a whole.
Last year, Korean exports had been on a decline for the second year in a row, while the nation’s export ranking also fell to 8th place in the world. However, in January and February this year, Korean exports grew 11.1 percent and 20.2 percent respectively, followed by rises of 13.7 percent in March, 24.2 percent in April, and 13.4 percent in May. So, Korean exports have been showing double-digit growth since the beginning of this year. Exports of Korea’s major products such as semiconductors, steel, petrochemicals, shipbuilding, and automobiles, have been performing well, while exports to countries outside of the Middle East and North America have also been growing. With growth in exports, which have been propping up the Korean economy, Korea’s stock market has also been performing well.
Looking at the KOSPI, Korea’s benchmark index has been staying well above 2,000 points. The market capitalization of listed companies in Korea reached $1.54 trillion, up 20.8 percent from the end of last year. Following the National Stock Exchange of India at 25.6 percent and the Bombay Stock Exchange at 25 percent, Korea’s market capitalization has increased relatively quickly compared to other countries in the world. The KOSPI has been on a steady rise, closing at 2,347.38 in May. The increase is one of the fastest in the world.
The Korea Composite Stock Price Index, or KOSPI, reached a historic high of 2,387.29 points on June 14th. With the steady growth, the Korean stock market capitalization increase rate was third in the world following the two Indian stock markets. The total market capitalization is 14th in the world. After President Moon Jae-in took office, the KOSPI’s rate of return reached 2.94 percent on a continued upward trend. It was the first time that the rate of return was in the positive in the first month after a new president took office, which is why there are high hopes for Moon’s economic policy dubbed “J-nomics”.
The backbone of President Moon’s “J-nomics” is to put people first. Previous administrations pushed for corporate growth to create jobs as they hoped for a trickledown effect, but these plans saw little success. That is why the current administration is trying to create more jobs in the public sector to improve income levels and consumption, creating a positive cycle in the economy. The government is also focusing on the fourth industrial revolution and countermeasures for it. With the revolution, changes will occur to the nation’s flagship industries. The government hopes to be the one leading the changes, and provide continued support for promising industries.
The government revealed new economic policies on June 10th, which included support for SMEs, the creation of jobs, and nurturing of 4th industrial revolution related technologies. These new policies are raising hopes for increased income levels and consumption in laying the foundation for new growth engines. However, the Korean economy’s future is not entirely rosy as private consumption’s contribution to growth remains low, household debt remains stagnant, and prices continue to be high. There are forecasts that the economy will not grow as expected due to unfavorable internal and external factors. The economy could contract due to geopolitical factors such as the North Korean nuclear issue, while risks stemming from the spread of trade protectionism remain high.
Conflict among the G2 nations and conflict with emerging economies will cause trade protectionism to flourish in the second half of the year. Domestically, there has been heightened expectation with the new president taking office, but there are fears that political uncertainties may escalate in the second half due to factors such as feuding ruling and opposition parties. Korea must monitor the types of trade protectionist policies to help Korean firms to respond before the policies take root. If the government provides the environment for companies to actively invest by maintaining the basic framework for its economic policies, it will lead to the creation of jobs and a virtuous cycle in the economy.
The Korean economy overcame difficulties to show signs of recovery during the first half of the year. In order to keep up the positive trend, a more active role would be required to help spur recovery.