[Trade Deficit 1 Year]④ Worst Scenario, Annual $70 Billion Deficit... 'Second Half Economy' Is Key

South Korea's trade balance has recorded a deficit for 12 consecutive months as of February this year, raising the likelihood that the economic slowdown trend will continue through the second half of the year. Various economic indicators, which serve as the basis for export and import forecasts, have shown unstable signs by exceeding expectations since the beginning of the year. If the trade deficit expands significantly and prolongs, as it did in January this year, concerns arise that not only the current account balance will worsen but also a series of issues such as a decline in external creditworthiness and a rise in exchange rates may occur.

According to the "2022 Export-Import Evaluation and 2023 Outlook" released by the Korea International Trade Association's International Trade and Commerce Research Institute at the end of last year, the trade balance is expected to record a deficit of $13.8 billion this year. This is the association's "base scenario," which assumes exports and imports will decrease by 4.0% and 8.0%, respectively, based on factors such as the COVID-19 slump, easing of the Russia-Ukraine conflict, and global economic downside risks. Notably, the association's other forecast, the "pessimistic scenario," divides eight external conditions?global inflation, interest rates, won-dollar exchange rate, Dubai crude oil, Chinese economy, IT industry, world economy (real GDP), and global trade?each assuming the worst-case changes.

Worst-Case Trade Deficit Forecast of $77 Billion

According to the pessimistic scenario, the trade deficit forecast for this year reaches approximately $77 billion. This figure is more than 60% larger than last year's record-high trade deficit (-$47.2 billion). Specifically, it assumes global inflation will rise until the end of the year, and the final target for interest rates will continue to increase. The won-dollar exchange rate is expected to experience repeated sharp fluctuations outside the 1,300?1,350 won range, and oil prices (Dubai crude) will exceed $100, causing energy costs to soar. Additionally, prolonged lockdowns in major Chinese cities, a sharp drop in demand and prices in the semiconductor and IT sectors, real GDP growth below 1%, and a roughly 2% decline in global trade are assumed.

While the likelihood of all these external conditions deteriorating to the worst-case scenario is low, uncertainties remain. On the 25th (local time), U.S. Treasury Secretary Janet Yellen expressed at the G20 Finance Ministers meeting in Bengaluru, India, that there is "still a long way to go" regarding the recent decline in inflation. This indicates that the U.S. has not yet entered the disinflation (slowing inflation) phase. Concerns about prolonged inflation in various countries are reemerging, and there is a growing atmosphere that global financial markets could return to the "tightening fear" seen in the second half of last year, with U.S. Treasury yields soaring.

The base interest rate is also an issue. Although the Bank of Korea kept the base rate steady at 3.5% on the 23rd of last month after about a year and a half, the won-dollar exchange rate has surged, and foreign investors have been net sellers in the stock market. Within three trading days after the rate freeze, the won-dollar exchange rate rose nearly 2% (25.5 won) compared to the closing price on the day of the freeze, leading some within the Bank of Korea to argue that the base rate should be raised to 3.75%. Furthermore, although China has begun reopening its economy, the ripple effects on the domestic economy remain minimal, which is another key variable. In the semiconductor sector, exports have sharply declined to the 40% range this year, already surpassing the association's estimate (-15.0%) and moving closer to the pessimistic scenario.

On the other hand, some forecasts suggest that export trends will follow a "low in the first half, high in the second half" pattern and begin to recover from the second half of the year. Kim Jeong-sik, emeritus professor of economics at Yonsei University, said, "The recent trade deficit is due to increased energy imports during the winter season when energy demand rises," adding, "If energy imports gradually decrease, there is a possibility of trade balance improvement." Heo Jin-wook, professor of economics at Incheon National University, said, "With the recent export slump centered on semiconductors continuing, the economic trend could rebound as early as the second half of this year."