[Urgent Diagnosis] Exports Decline and Consumption Slumps... South Korea's Economic Growth Rate Continues to Fall

Second Half Outlook for the Korean Economy
Growth Rate Forecasts for Korea Lowered by ADB and IMF

Major domestic and international institutions are unanimously lowering their economic growth forecasts for South Korea compared to previous predictions. This contrasts with the outlook for global economic recovery. South Korea's unique growth engine, heavily reliant on semiconductors, is facing structural limitations, while even the capacity for private consumption has weakened.

As of the 2nd, the economic growth forecasts for South Korea by major international organizations show a clear downward trend. The Asian Development Bank (ADB) lowered South Korea's economic growth rate for this year by 0.2 percentage points from April to 1.3% last month. The Organisation for Economic Co-operation and Development (OECD) has downgraded its economic outlook five consecutive times since December 2021 (2.7%). In June, it projected a 1.5% growth rate, 0.1 percentage points lower than the forecast in March. The International Monetary Fund (IMF) also revised its forecast down from 1.5% in April to 1.4% in July.

The government and the Bank of Korea have followed suit. The Ministry of Economy and Finance projected a 1.4% real gross domestic product (GDP) growth rate for this year in its “2023 Second Half Economic Policy Direction” announced on the 4th of last month. This is down from the 1.6% forecast presented in December last year. The Bank of Korea also lowered its growth forecast from 1.6% to 1.4% in May. The Korea Development Institute (KDI) reduced its forecast from 1.8% in February to 1.5% in May.

In contrast, the global economic outlook is improving. The IMF projected a 3.0% global economic growth rate in July, 0.2 percentage points higher than its forecast in April last year. It also raised growth forecasts for major countries such as the United Kingdom (by 0.7 percentage points), the United States (by 0.2 percentage points), and Japan (by 0.1 percentage points). The OECD also increased its global economic growth forecast from 2.6% to 2.7% in June. The Group of Twenty (G20) growth forecast rose from 2.6% to 2.8%, and China’s forecast increased from 5.3% to 5.4%.

The main reason major institutions have collectively lowered South Korea’s growth outlook is the impact of export sluggishness due to deteriorating external conditions. According to the Ministry of Trade, Industry and Energy’s export-import trends, exports have declined for 10 consecutive months since October last year. In July, exports fell by 16.5% compared to the same period last year. This was largely due to a slowdown in global demand for semiconductors, especially weakened demand from China, South Korea’s largest market. The decline in semiconductor exports to China has continued for 14 months since June last year, reaching 40.8% as of last month. This figure exceeds the overall semiconductor export decline rate of 34%.

The problem is that China’s demand for South Korean semiconductors is likely to continue decreasing. Professor Kim Young-ik of Sogang University Graduate School of Economics explained, “China has shifted its production strategy to produce most products domestically,” adding, “As China transforms into a country that produces and consumes on its own, its dependence on South Korean semiconductor imports is decreasing.” According to the Ministry of Trade, Industry and Energy’s export-import trends for July, exports to China, South Korea’s largest trading partner, decreased by 25.1%.

Even private consumption, which had supported growth, has turned to a decline. According to the Bank of Korea, private consumption, which had played a supporting role in South Korea’s economic growth during export slumps, decreased by 0.1% in the second quarter. It had increased by 0.6% in the first quarter due to the full lifting of COVID-19 restrictions but reversed to a decline within one quarter. The high-interest-rate environment is also weakening household consumption capacity. The OECD stated, “In South Korea, high interest rates and a sluggish housing market are acting as burdens on private consumption and investment.”

In major countries such as the United States, the economy is likely to recover centered on the domestic market. The OECD evaluated that “private consumption is supporting the United States,” and the ADB noted that “India, the Philippines, and Thailand are showing high growth rates thanks to strong domestic demand.” The Korea Institute for International Economic Policy also highlighted in May that the U.S. employment indicators (3.5% unemployment rate in March) remain robust and that retail sales are increasing despite inflationary pressures.