The Bank of Korea: "Export Boom to Continue for a While... Growth Rate Likely to Slow Down" [Q&A]

Q3 Real Gross Domestic Product (GDP) Press Briefing
Exports Continue Strong but Growth Rate Expected to Slow
Annual Growth Forecast Adjustment Inevitable

The Bank of Korea commented on the 0.4% decrease in exports in the third quarter of this year, stating, "Since the growth rate compared to the same period last year is still at a high level, it is difficult to say that the export situation is bad," and added, "It is generally expected that the export boom will continue for the time being."

On the 24th, Shin Seung-chul, Director of the Economic Statistics Bureau at the Bank of Korea, said at a press briefing following the announcement of the 'Third Quarter Real Gross Domestic Product (Preliminary)' that "Looking at customs clearance exports, exports have been on an upward trend for 12 consecutive months, so although the growth rate itself will slow down in the future, the boom is expected to continue," and "The IT industry cycle is expected to be maintained until the first half of next year."

Regarding the turnaround to negative exports, he explained, "At present, it is a process of adjustment due to strikes at automobile companies and the base effect in the IT sector, so it is better to see it as a pause rather than a sign of serious export recession or sluggishness," and added, "Whether the export economy has declined or will rebound should be judged comprehensively by looking at how the IT cycle changes and how the economic situation of major countries improves."

On the possibility of achieving the annual economic growth target of 2.4%, he said, "Since the actual figure came out lower than the third-quarter forecast, it seems arithmetically difficult to achieve 2.4%," and added, "Arithmetically, the fourth quarter needs to record 1.2% for the annual growth rate to exceed 2.4%."

Regarding the difference from the August forecast by the Research Department (which expected 0.5%), he explained, "At the time of the forecast, it was expected that the global manufacturing economy and trade volume would improve compared to last year, the U.S. was showing growth, and China was implementing economic stimulus policies, so it was expected that exports would show a favorable trend," but "Recently, economic conditions have changed significantly, global economic recovery has slowed, and China's economy is sluggish mainly in domestic demand, so the situation has changed from the time of the forecast."

Below is a Q&A with Director Shin.

- Recently, the Bank of Korea blog mentioned that exports in the second half would continue to show a favorable trend. However, exports in the third quarter recorded a negative figure. What is the reason?

▲The growth in the IT sector has slowed, and the non-IT sector showed greater-than-expected sluggishness. The IT sector, centered on semiconductors, had continued export growth from the second half of last year through the first half of this year. There was an adjustment aspect to this. Although it contributed positively to exports, the contribution itself slowed. The non-IT sector saw decreases in automobiles, chemical products, and electrical equipment. Automobiles declined due to strikes at finished car-related companies and facility maintenance work, resulting in a decrease in export volume. Chemical products and electrical equipment showed sluggishness as demand for electric vehicles slowed, leading to a decrease in battery materials used in secondary batteries. Although exports in the third quarter turned negative, it is difficult to say that the export situation is bad. The growth rate compared to the same period last year is still at a high level. The general view is that the export boom will continue for the time being.

- Why do you say the export boom will continue for the time being?

▲Looking at customs clearance exports, exports have been increasing for 12 consecutive months, and although the growth rate itself will slow down in the future, the boom is expected to continue. Trade conditions have improved compared to last year, when global trade volume and South Korea's growth rate were low, and especially the IT industry was weak in the first half but improved from the second half. The IT industry cycle is expected to be maintained until the first half of next year.

▲South Korea's exports are greatly influenced by the economic conditions of major overseas countries and global trade volume. So far, the U.S. economy has been relatively good compared to last year, and exports of major countries have also been favorable. Exports have increased mainly in automobiles and IT items. Although the overall trend will see a slowdown in export growth, the export economy itself is expected to show a favorable trend.

▲Recently, uncertain factors affecting exports have emerged, so while a favorable trend is expected to continue, it is uncertain how these will impact exports. The overall trend is that the favorable export trend will continue for the time being, but the export growth rate will not be as high as before. Many uncertain factors related to exports have arisen, so their impact needs to be closely monitored.

- Is the slowdown in semiconductor export growth due to a decrease in volume?

▲Semiconductor exports are announced on a customs clearance basis, so both price and volume factors are reflected. Recently, semiconductor prices have been adjusting. From the second half of last year through the first half of this year, volume continued to increase but has recently been adjusting. Since customs clearance data reflects price factors significantly, the increase in price compared to the same period last year had a greater impact than the slowdown in volume. I understand that this month's semiconductor customs clearance export growth rate was still high.

- The Research Department forecasted 0.5% economic growth for the third quarter in August. Why was the actual figure lower than the forecast?

▲The goods balance is based on nominal growth rate, so the price increase of IT items is reflected. The customs clearance export growth rate is still at a high level, and the current account and trade balance, which are based on customs clearance data, are showing large surpluses.

▲Looking at domestic demand and net exports separately, domestic demand growth contribution was forecasted similarly to the announced figure despite differences in individual items. The difference was in the export sector. At the time of the August forecast, the economic trend suggested an increase, but in reality, it decreased. There was a gap between the forecast and actual figures in exports.

▲The decrease in exports was influenced by the worsening sluggishness in non-IT export items. The Research Department expected global manufacturing economy and trade volume to improve compared to last year, the U.S. to show growth, and China to implement stimulus policies, so it forecasted a favorable export trend. However, recent economic conditions have changed significantly, global economic recovery has slowed, and China's economy is sluggish mainly in domestic demand, which likely influenced the situation. The situation has changed from the time of the forecast.

- Are exports better than expected compared to the August forecast?

▲Goods exports maintained positive growth for six consecutive quarters until the first half. Under the forecast conditions at that time, it was expected to be fine. However, the third quarter recorded a negative figure. It is difficult to say that the export economy, which had been good, has declined. Compared to the same period last year, the level is still high. Although exports, which had increased for six consecutive quarters, turned slightly negative this quarter, it is difficult to say the export economy itself has worsened. Currently, it is seen as an adjustment process due to automobile strikes and the base effect in the IT sector. How to interpret exports turning from positive to negative in the third quarter is important. The general forecast is that it is better to see it as a pause rather than a sign of serious export recession or sluggishness. Judgments on whether the export economy has declined or will rebound require more time, considering how the IT cycle changes and how the economic situation of major countries improves. It is premature to judge that the export economy has declined based solely on the third-quarter figures.

- Like in the first quarter, the actual figures deviate from the Research Department's forecast this quarter as well. What is the reason?

▲In the first quarter, growth was much higher than expected, causing a gap between the Research Department's forecast and actual figures. This led to an upward revision of the annual growth forecast. At that time, the first-quarter actual figure was very high, so it was expected that the second quarter would adjust, but considering conditions, annual growth would be in the mid-2% range. Hence, the forecast was revised upward. Looking back, the first quarter saw a revision due to easing of geopolitical risks and project financing (PF) risks after the Legoland incident last year.

▲It is normal for forecasts to differ from actual figures. Since early this year, the assumptions underlying forecasts have been changing. Uncertainties about geopolitical risks, demand sluggishness due to global economic slowdown, impacts of the Russia-Ukraine war expansion, and fluctuations in the U.S. economy as well as changes in major countries' economies and IT industry cycles have increased uncertainty.

- With the deviation from forecasts, it seems less likely to achieve the annual economic growth target of 2.4%. What growth rate is needed in the fourth quarter to achieve the 2.4% target?

▲Arithmetically, if the fourth quarter records 1.2%, the annual growth rate will exceed 2.4%. Since the actual figure came out lower than the third-quarter forecast, it seems arithmetically difficult to achieve 2.4%. The Research Department also lowered its August forecast and recognized uncertainty. At the October evaluation, internally, it was seen that uncertain factors were materializing. The Research Department is expected to adjust the annual growth forecast in the next forecast after checking various domestic and external uncertainties.

- At the August international balance of payments briefing, it was said that semiconductor customs clearance exports in September reached an all-time high and that the strong export boom of IT items would continue. You mentioned that the growth of IT items would slow down. Why has the situation changed?

▲Semiconductors also saw production adjustments by semiconductor companies in the first quarter of last year, leading to a downturn in the semiconductor industry from the second half of 2022. After production adjustments in early last year, semiconductor volume increased from the second quarter onward. This continued until the second quarter of this year, but the growth slowed in the third quarter. Although IT exports increased, the growth rate slowed.

- What are the upside factors for future growth?

▲This quarter's growth rate was temporarily affected by facility maintenance and automobile strikes. These factors ended within the third quarter, so they are expected to be reversed in the fourth quarter. However, due to many uncertainties, it is difficult to predict the fourth quarter.

▲Fundamentally, the Korean economy is expected to grow positively unless there are external shocks or uncertainties. The Research Department forecasted that easing of high inflation and high interest rates, which had constrained domestic demand, would contribute to domestic demand recovery. Although private consumption recovery is not rapid, it has been on a rising trend compared to the same period last year since last year. It is a gradual but improving trend. The easing of price instability and high wage growth in private consumption are expected to positively affect consumption capacity. The consumer sentiment index also rose in October.

▲The construction sector is expected to remain sluggish for the time being. Investment in semiconductor manufacturing equipment and aircraft, which significantly affect facility investment, was delayed in the first half but took place in the third quarter, which is expected to contribute to domestic demand. Domestic demand is showing a gradual recovery trend.

- Private consumption increased mainly in passenger cars and communication devices. It seems like one-time consumption. Can the improvement in private consumption be sustained? Some criticize the Bank of Korea for giving an overly optimistic outlook on domestic demand.

▲The increase in private consumption in the third quarter was due to passenger cars and communication devices. There were new car launches and new mobile phone releases in the third quarter. However, the effects of new car and product launches do not last long, so the impact is expected to decrease in the fourth quarter.

▲Automobiles had shown sluggish demand for nearly a year. Due to electric vehicle accidents, demand was weak, but the new car launch effect is expected to alleviate the demand slump. We do not view domestic demand very optimistically. Private consumption is assessed to be gradually recovering. Overall domestic demand is forming conditions favorable to investment and facility investment as price burdens ease and interest rates decline.

- How do you judge between an export adjustment period and an export recession?

▲Whether the export economy is favorable or in recession requires looking at various factors. First, detailed data on trade balance based on customs clearance should be examined. It is necessary to see which major export countries received more exports and what export items are involved. Whether GDP growth contribution was made on a volume basis is also a consideration, but regarding the export economy itself, it is important to comprehensively assess the situation of South Korea's main export items, overseas demand, and the economic conditions of major export trading countries.

- Domestic demand is recovering, but net exports are not good. With low growth, there may be calls for interest rate cuts as a response.

▲At the last Monetary Policy Direction Meeting, the base interest rate was cut, and there have been discussions in the media, various institutions, and the National Assembly about whether more cuts are needed and how much impact a 25bp (1bp=0.01 percentage point) cut has. It is difficult to explain the effects of the policy, but a single interest rate cut does not immediately affect domestic demand. There is a time lag, so the effect of the interest rate cut on domestic demand needs to be observed. Future additional rate cuts will be decided based on various conditions.

- There is talk of a 'semiconductor winter,' but you said the export upcycle would be maintained until the first half of next year. Do you expect the negative trend compared to the previous quarter to continue in the fourth quarter? How do you view the export trend in the second half?

▲When statistics come out well this quarter, it tends to be expected that the future will be good, and when they come out poorly, only downside risks are seen. So, forecasts are influenced by recent figures. Since third-quarter exports turned negative, concerns about negative exports in the fourth quarter are natural.

▲The third-quarter figures hinge on how much the sluggishness in the non-IT sector will recover and whether the adjustment in the IT sector, which led exports, will deepen or reverse. It is difficult to definitively say whether exports will be positive or negative compared to the previous quarter. However, customs clearance data shows the trend is maintained, and temporary factors like strikes have been resolved. Although there are many uncertainties, if they do not materialize, exports are expected to be positive. It is difficult to speak with certainty. The fourth-quarter forecast will be included in the November Research Department forecast.