South Korea’s economy is expected to grow 1.2 percent this year due to weak global demand, high interest rates and the tight energy market, top economists of French credit insurance agency Coface have said.
The forecasts by Jean-Christophe Caffet, Coface’s chief economist, and Bernard Aw, the chief economist of the agency’s Asia Pacific division, are much lower than the 1.6 percent growth outlook projected by the Bank of Korea (BOK) and the 1.5 percent expansion estimated by the International Monetary Fund.
In 2022, South Korea’s economy expanded 2.6 percent, slowing from a 4.1 percent advance the previous year amid aggressive monetary tightening at home and abroad.
The BOK has said it may lower its growth estimate for the year due to uncertainties over a recovery in the information and technology sector and a delay in the much-awaited effect of China’s reopening.
Aw said South Korea’s export-driven economy is facing headwinds this year due in part to sluggish exports of semiconductors, the country’s key export item. In April, outbound shipments of semiconductors plunged 41 percent on-year on falling demand and a drop in chip prices.
Aw said South Korea’s chips producers will have to cut their production to reduce their excessive inventories amid waning global demand.
In April, Samsung Electronics Co. said it was cutting memory production “to a meaningful level,” in a sharp departure from its previous position that it would not artificially reduce output as part of efforts to gain a bigger market share.
Its smaller rivals like SK hynix and Micron had moved several months earlier than Samsung did and pulled back on production in order to ease a severe supply glut that drove down prices.
“For the excess inventory to be cleared, it could take at least three to four more quarters,” Aw said in an interview with Yonhap News Agency in Seoul on Tuesday, as he forecast the chips upturn timing will likely be next year. “In the best case scenario, maybe end of this year,” he said.
According to Coface, revenues of the global smartphone industry fell 7 percent on-year in the first quarter of this year, despite price increases from major players, including Apple Inc. and Samsung Electronics.
Aw said high interest rates are to blame for the expected slowdown in South Korea’s economy, saying they will affect consumption growth here and vulnerable industries, such as construction.
The BOK had raised borrowing costs seven straight times to tackle inflation before freezing its key rate at 3.5 percent in February.
On the possibility of additional rate hikes, Caffet said the BOK is unlikely to further increase borrowing costs as it is closely related to the U.S. Federal Reserve’s policy rate, which seems to be high enough.
Unlike the orthodox economic view, Caffet claimed monetary policy is “absolutely ineffective in fighting inflation” and only adds more financial tensions to the banking sector. “Falling inflation is linked to falling energy prices,” he said.
Aw also supported Caffet’s views, saying South Korea is a net energy importer, and a recent fall in energy prices has led to a drop in consumer inflation.
“If you look at the core inflation, which strips up the volatile items, like food and energy, it is actually quite sticky, which means the underlying inflationary pressure is still there,” Aw said, referring to South Korea’s core inflation rate.
South Korea’s consumer prices, a key gauge of inflation, rose 3.7 percent in April from a year earlier, marking the first time in 14 months that on-year inflation growth fell below 4 percent, amid falling global oil prices
Core inflation rose 4.6 percent on-year last month, compared with 4.8 percent growth in March.
On the corporate outlook, Aw said South Korean companies’ corporate insolvency rates have been declining over a long period of time in general, but some sectors, such as utility, electricity generation and construction, can be more vulnerable to liquidity risks, as they are easily affected by commodity prices.
The chemical sector could also face pressure due to energy prices and a slowdown in growth of global gross domestic product, he added.
On the other hand, fast recovery in tourism is a plus for South Korea, though it is not yet back to the pre-pandemic level in 2019, Aw said.
The number of foreign visitors to South Korea hit a record high of 17.5 million in 2019, generating tourism revenue of US$20.7 billion, according to data compiled by the Korea Tourism Organization.
However, due to the COVID-19 pandemic, the number of visitors dropped sharply to 2.5 million in 2020 and 967,000 in 2021 before increasing to 3.19 million in 2022.
Meanwhile, Caffet warned the global economy is exposed to recessionary downside risks in 2023, saying there is a pattern of worldwide GDP growth going under 2 percent after a rapid hike in energy bills, referring to economic slowdowns after the first and second oil shocks in the 1970s and a climb in energy prices ahead of the 2008 financial crisis.
In 2022, global energy prices soared due mainly to disruptions to the energy market sparked by Russia’s invasion of Ukraine.
Source: Yonhap News Agency