[2023 Economic Outlook] Trade Deficit Emerging as a 'Trigger'... Unstable Current Account Balance

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Dongwoo Lee, Sejong=Reporter Junhyung Lee] South Korea's trade balance recorded a deficit for eight consecutive months as of last month, raising the likelihood of continued economic slowdown until the second half of next year. The trade balance is a key indicator reflecting South Korea's 'export competitiveness.' A worsening trade balance in a manufacturing-based export powerhouse implies a weakening of the international competitiveness of our export companies. Concerns are emerging that if the prolonged trade deficit next year leads to a current account deficit, it could not only reduce external credibility but also exacerbate the vicious cycle of our economy due to foreign currency liquidity issues.

◆ $13.8 Billion Trade Deficit Next Year...Alarm Over Decline in Key Export Items= According to the '2023 Export-Import Outlook' recently published by the Korea International Trade Association on the 5th, South Korea's trade balance is expected to show a deficit of $13.8 billion next year. The analysis suggests that external uncertainties such as the global economic recession, prolonged Russia-Ukraine war, and sharp contraction in consumer sentiment due to rising prices and interest rates will impact export declines next year. However, due to falling oil prices and economic slowdown, imports are expected to decrease more than exports, reducing the anticipated trade deficit by nearly 70% compared to this year (approximately $45 billion).

The main cause of the trade deficit is the rise in energy prices such as crude oil, gas, and coal since the beginning of the year, but the problem is the expanding decline in exports of key export items like semiconductors and petrochemicals, which serve as the 'main pillars' of our exports. Last month, semiconductor exports amounted to $8.554 billion, down 29.8% year-on-year, marking a decline for four consecutive months. This is due to falling prices and weakening demand for memory products such as DRAM and NAND flash, leading to increased inventory. The conditions for our major export items next year are also expected to worsen. With IT device demand declining through next year, exports of semiconductors (-15%) and petroleum products (-13.5%) are projected to decrease by double digits. Additionally, key export items such as steel (-9.9%), petrochemicals (-9.4%), and home appliances (-4.8%) are expected to struggle.

The deteriorated external environment is also unlikely to recover easily. The International Monetary Fund (IMF) lowered its global economic growth forecast for next year to 2.1%, down 0.8 percentage points from this year's 2.9%. Growth rates for the U.S. (1.0%) and Eurozone (0.5%) are also expected to decline by 0.6 to 1.3 percentage points compared to this year. The ongoing conflict involving Ukraine, the standoff between the U.S. and China over Taiwan, and tensions between Europe and Russia are expected to continue next year, prolonging financial tightening among major countries. In response, the South Korean government plans to focus all ministries' efforts on export support, providing tailored, pinpoint assistance by dividing markets into three major key markets (ASEAN, U.S., China) and three strategic markets (Middle East, Latin America, European Union (EU)).

◆ Trade Deficit Emerging as a ‘Detonator’...Worrying Current Account Balance= As the trade deficit grows, warning signs have also been triggered in the current account balance. In September, the current account recorded a surplus of $1.61 billion, returning to surplus just one month after posting a $3.05 billion deficit in August. However, the surplus amount sharply decreased by 84.7% ($8.89 billion) compared to a year ago ($10.51 billion). The cumulative current account surplus from January to September this year was $24.14 billion, down 64.1% ($4.37 billion) from the same period last year ($67.41 billion). This is the result of an eight-month consecutive trade deficit from April to November this year, shrinking the goods balance (the gap between exports and imports), which accounts for the largest portion of the current account.

Global supply chain instability is adding negative factors to the outlook for next year's current account. If import costs rise sharply due to soaring energy prices such as oil, it will inevitably have an adverse effect on the goods balance. Uncertainties related to the Ukraine crisis and production cuts by the Organization of the Petroleum Exporting Countries (OPEC) Plus remain. Accordingly, global investment bank Goldman Sachs recently forecasted next year's international oil price at $110 per barrel.

The government also views the uncertainty surrounding next year's current account flow as significant. This is why the Bank of Korea drastically lowered its current account surplus forecast for this year from $37 billion to $25 billion in its revised economic outlook released at the end of last month. The Bank of Korea also lowered its current account surplus forecast for next year from $34 billion in August to $28 billion. A Bank of Korea official said, “The future current account will likely be influenced by China's easing of quarantine measures and global growth trends, so uncertainty remains very high.”

There is also a view that the current account is showing signs of a ‘recession-type surplus,’ where both exports and imports decline simultaneously. The dominant analysis is that the current account surplus in September was due to reduced imports following the drop in international oil prices. South Korea also experienced a recession-type surplus during the 2008 financial crisis when exports and imports both decreased simultaneously. Professor Tae-yoon Sung of Yonsei University’s Department of Economics said, “Considering the current domestic and international situation, conditions for a significant improvement in the current account are not favorable,” adding, “It is uncertain whether the current account will improve next year through increased exports rather than oil price stabilization.”