The year 2017 is coming to an end. This year, South Korea held a rare presidential by-election to get rid of political and economic uncertainties triggered by the impeachment of former president Park Geun-hye. The improved economic indexes, in particular, brightened the prospects for the nation’s departure from years-long recession and another economic take-off. But there are still grave tasks to contend with, including the high unemployment rate and stagnant household income. In other words, the Korean economy has improved while still grappling with risk factors. Here is Lee In-chul, director of the Real Good Economic Institute, to look back at the Korean economy this year.
For the Korean economy, 2017 can be described as the year of “sweet after bitter.” The economy suffered some difficulties in the first half of the year but the situation got better in the second half. Around the presidential election in May and the first power transition to liberals in 10 years, uncertainties were growing in politics, society and the economy. Also, there were rumors that a crisis may erupt in a particular month due to China’s economic retaliation against South Korea’s decision to deploy the THAAD system. But the new government, upon its inauguration, carried out supplementary budget plans to boost employment, with its new policies taking concrete shape. On the back of the global economic recovery, South Korea enjoyed robust exports led by semiconductors. The nation achieved economic growth of 3 percent this year, the highest level in three years.
From the parliamentary impeachment of former president Park Geun-hye on December 9, 2016 to the presidential election on May 9 this year, politics dominated the headlines here. The political turmoil affected the economy negatively. In fact, outlooks for the Korean economy were not bright. Leading economic research institutes in Korea lowered this year’s economic growth rate to 2.1 percent from the earlier projection of 2.6 percent, while the OECD also revised down the growth forecast to 2.6 percent. Fortunately, strong exports propped up the economy. Exports that had previously suffered negative growth made a turnaround in November 2016 and continued to grow. With exports on the right track, South Korea’s annual trade volume surpassed 1 trillion US dollars as of December 14.
South Korea’s combined imports and exports exceeded 1 trillion dollars for the first time in three years. The nations’ trade stayed above the trillion dollar mark for four years from 2011 to 2014 but failed to reach the landmark for the following two years. Outbound shipments between January and September this year increased 18.5 percent, recording the fastest growth rate in exports among the top 10 exporting nations and ranking sixth in exports, up two spots from last year. The nation enjoyed upbeat sales of information and communication technology products. Exports of semiconductors, in particular, jumped 56 percent on-year to 88.3 billion dollars during the January-November period.
South Korea’s exports for the first 11 months increased 16.5 percent year-on-year to reach 500 billion dollars in the shortest period ever. Korea is one of only nine countries to achieve 1 trillion dollars of annual trade. South Korea’s share of total international trade also amounted to a record high of 3.3 percent in the January to September period. The positive development is the result of the global economic recovery, Korea’s efforts to diversify export items and balanced growth in various regions in the world. Brisk shipments of semiconductors definitely merit attention. This year, Samsung Electronics and SK Hynix, the world’s two largest memory chip makers, are expected to see their combined semiconductor sales reach an all-time high of 100 trillion won or about 90 billion dollars. Driven by the strong performance of local exporters, the Korean stock market has made history this year.
This year, the Korean stock market went through the roof. The benchmark Korea Composite Stock Price Index, or KOSPI, previously fluctuated between 1,800 and 2,200, earning the nickname “boxpi.” It is a combination of KOSPI and the word “box,” meaning the index is boxed in. But this year, it soared to 2,500, while the tech-heavy KOSDAQ reached the 800 mark for the first time in ten years. Until early this year, uncertainties prevailed due to unstable domestic politics. North Korea’s nuclear test was also bad news for the local stock market. Despite various unfavorable factors, the stock market remained bullish, driven by the stellar performance of Korean exporters. During the first three quarters of this year, combined operating profits of companies listed on KOSPI surpassed 120 trillion won or about 110 billion dollars, up more than 27 percent on-year. The improved corporate performance contributed to luring foreign investors to the local stock market. This year, the Korean stock market has been the fifth-best performer among bourses in the G20 nations, up nine places from last year, when KOSPI’s on-year gain of 3.3 percent ranked 14th among the G20 nations.
In 2017, the Korean stock market has stayed bullish. In the face of political instability and North Korea-related risks, KOSPI closed at 2,241.24 on May 4, posting a six-year record high. After that, the index rose even faster. It exceeded 2,400 in June and 2,500 after the Chuseok holiday in October. And on November 2, it soared to an all-time high of 2,561.63. The secondary KOSDAQ also began to enjoy a bullish rally in October. On November 24, the index hit an intraday high of 803.74, the highest in 10 years. This year, however, the Korean economy has suffered setbacks as well.
China’s unconcealed economic retaliation against South Korea over the THAAD dispute started from its ban on Chinese group tours to South Korea in March and hit many Korean industries, including airlines, tourism, duty-free shops, department stores and hotels. According to statistics by the Bank of Korea, more than 8 million Chinese tourists visited Korea last year, but the figure is projected to shrink to 4 million this year. Korean companies doing business in China have also been dealt a heavy blow. Due to growing anti-Korean sentiment within China over the THAAD issue, sales of Hyundai Motor and Kia Motors in China fell by half. Lotte Group, in particular, became a target of China’s retaliation as it provided its land to the South Korean government as the host site of the THAAD system. Its 112 Lotte Mart discount stores in China have suspended operations for nearly a year. Not only China but the U.S. has also been hard on South Korea. Since his inauguration, U.S. President Donald Trump has been strengthening trade protectionism, seeking to impose heavy tariffs on South Korea’s major export items, such as steel and petrochemical products, solar panels, washing machines and semiconductors. Trump called the South Korea-U.S. free trade agreement “horrible,” and even mentioned the possibility of terminating it. By using strong rhetoric, he is demanding revisions to the FTA in favor of the U.S.
In addition to the unfavorable external factors, the Korean economy has to address other domestic problems as well.
The government was able to achieve the target growth rate of 3 percent, supported by strong exports and fiscal spending. The economic growth rate of 3 percent is highly significant. Still, it is questionable whether ordinary citizens may actually feel that the economy is in better shape. The key interest rate hike is increasing the debt repayment burden of households in Korea, with household debt reaching 1,400 trillion won or 1.3 trillion dollars. Self-employed and small-and mid-sized enterprises are concerned about rising labor costs as Korea’s minimum wage is set to increase by 16 percent next year. Many young people remain unemployed, while consumer sentiment has yet to recover. The sluggish domestic demand is aggravating the polarization. On the whole, the Korean economy will still have to deal with difficult problems next year.
It is doubtful whether the 3-percent economic growth will lead to job creation. Also on a gloomy note, the average monthly real income per household fell by 0.2 percent in the third quarter from a year before. The Moon Jae-in government declared job creation and income-led growth as its key economic agenda. Next year’s budget was finalized this month. We’re looking forward to some positive result of the government’s economic policies in the coming year.