[Why&Next] ADB "The World's Top 3 Economic Threats: 'Exports, China, Semiconductors'... South Korea Hit by All"

ADB Lowers South Korea's Economic Growth Forecast from 1.5% to 1.3%
OECD, IMF Also Downgrade in Succession
Severe IT Concentration and Semiconductor Recession Shake the Nation
South Korea Cannot Recover if China's Economy Worsens
"Urgent Need for Structural Reform and Restructuring in South Korea's Economy"

The second half of the year, which will determine whether the economy experiences ‘sangjeohago’ (low growth in the first half, high growth in the second half), has begun, but South Korea’s economic growth outlook remains bleak. While the global economy is recovering from the shock of COVID-19, South Korea alone is showing a trend of slowing growth. International organizations cite the excessive focus on the information technology (IT) sector and overdependence on exports to China as the main causes. With population decline making it difficult to expect fundamental domestic demand revitalization, concerns are rising that without strong structural reforms, low growth will become entrenched.

The Asian Development Bank (ADB)’s ‘Supplement to the Asian Economic Outlook 2023’ report published yesterday highlights South Korea’s chronic economic problems. ADB downgraded South Korea’s economic growth forecast from 1.5% in April to 1.3%, a 0.2 percentage point cut. ADB pointed out, “South Korea’s economic growth outlook will be slower than previously predicted,” adding, “The ‘inertia’ in IT and the minimized ‘spillover’ effect from China’s economic recovery have caused export contraction.”

Severe IT Concentration, Nation Shaken by Semiconductor Recession

[Image source=Yonhap News]

The IT sector mentioned by ADB refers to the semiconductor industry. South Korea’s industrial structure is heavily skewed, with semiconductors accounting for 19.3% of exports last year and 18.5% of manufacturing value added in 2021. Particularly, memory semiconductors, which are highly sensitive to economic cycles, make up 57.1% of semiconductor exports. This is higher than competitors such as the United States (29.9%), Japan (24.5%), and Taiwan (21%). Startups are also IT-focused. According to the Korea Venture Business Association, 31.2% of early-stage venture startups chose IT industries. This structure makes it easy for the semiconductor downturn to spread to the overall economy.

This year’s ‘sangjeo’ phenomenon in South Korea was also strongly influenced by the semiconductor recession. At the beginning of this year, both semiconductor export volume and export prices fell simultaneously for the first time since the 2008 global financial crisis. The semiconductor market was as bad as during the financial crisis. In fact, semiconductor exports in January dropped sharply by 44.5% year-on-year. Consequently, South Korea’s total exports decreased by 16.6%. According to the Korea International Trade Association, semiconductors accounted for 52.4% of the total export decline.

The government’s confidence in the ‘hago’ (high growth in the second half) was also related to the semiconductor cycle. Major domestic and international institutions expected demand for computers and mobile devices to bottom out in the second to third quarters. Computers are replaced every 4?5 years and mobile devices every 2?3 years, with previous bottoms in 2019 and 2020 respectively. According to this calculation, the semiconductor market would bottom out and rapidly improve from the second half of the year as in the past.

If China’s Economy Is Weak, South Korea Cannot Recover Either

[Image source=Yonhap News]

Nevertheless, South Korea’s growth forecast keeps declining largely due to China’s influence. China accounts for 55% of South Korea’s semiconductor exports. Although South Korea has been reducing its dependence on China since 2018 due to the US-China dispute, the dependence remains high. If China’s reopening effect is smaller than expected and China’s semiconductor self-sufficiency rate steadily rises, domestic semiconductor market recovery will inevitably be slow. This means the semiconductor market recovery timeline initially expected by the government and major institutions has been gradually pushed back. Choi Tae-won, chairman of the Korea Chamber of Commerce and Industry, recently held a press conference and said the recovery point would be “in six months or a year.”

On the other hand, the global economic outlook is becoming more optimistic than initially expected. The Organisation for Economic Co-operation and Development (OECD) raised its global economic growth forecast from 2.6% to 2.7% last month, a 0.1 percentage point increase. The Group of Twenty (G20) growth forecast also rose from 2.6% to 2.8%, and China’s forecast increased from 5.3% to 5.4%. The International Monetary Fund (IMF) also raised Asia’s growth forecast by 0.3 percentage points to 4.6% in May.

This difference is attributed to domestic demand factors. ADB evaluated, “The manufacturing Purchasing Managers’ Index (PMI) fell below 50, showing weakness in South Korea, Singapore, and China,” but “India, the Philippines, and Thailand are showing high growth supported by strong domestic demand.” This means that although the global export market is difficult due to recession, countries with strong domestic demand have better growth prospects.

[Image source=Yonhap News]

South Korea has significant domestic demand instability. While high interest rate policies have curbed inflation, they have also constrained domestic demand recovery. The Hyundai Research Institute released a revised forecast report last month, stating, “The shock of high interest rates and high inflation has weakened household real purchasing power, which may limit domestic demand recovery.” The OECD also pointed out, “South Korea’s increased debt repayment burden and sluggish housing market will continue to weigh on private consumption and investment.” The timing for demand increase is expected not in the second half of this year but in 2024. The private consumption and investment trends forecasted by ADB also show weakness in 2023 and improvement in 2024.

"South Korean Economy Urgently Needs Structural Reform and Restructuring"

This is why recommendations for structural reform of the South Korean economy are emerging. Kim Dae-jong, professor of business administration at Sejong University, explained, “China accounts for about 15% of the global economy, but South Korea depends on it for more than one-third of its economy. Without structural reform to diversify export countries and semiconductors, solving the problem will be difficult.”

There are also calls to revive economic vitality through intensive restructuring. An official from a government-funded research institute, who requested anonymity, criticized, “With population decline due to low birth rates, the fundamental solution is restructuring. The COVID-19 period was a golden opportunity to weed out insolvent companies and naturally allow market exit to reorganize South Korea’s economy, but our government missed it.”

The OECD advised, “(South Korea) has structural problems and needs policy measures. Rapid aging is occurring, so fiscal soundness must be ensured. Education for the unemployed should be activated, social safety nets strengthened, and workforce reallocation facilitated.”