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AustralienGrowth pickup on ICT recovery
South Korea’s economic growth has been slowing since mid-2021 as exports and investment struggled in a challenging external environment. The South Korean economy is significantly dependent on the global demand, with trade in goods and services accounting for over 70% of its GDP. Growth has decelerated from 2.6% in 2022, to just 1% in the first three quarters of 2023. But Korean economic activity is expected to pick up in 2024, driven by a recovery in global electronics. Merchandise goods exports were down 12% y/y in the first nine months of 2023, as shipments of ICT, home appliances, computers and petrochemical products fell sharply. Semiconductor exports plunged 35%, as global demand for memory chips weakened significantly. Strong growth in automobile exports, helped by an improvement in auto parts supply chains, was insufficient to boost export performance. But the final quarter of 2023 showed stronger signs of a turnaround in the export sector, with producers’ inventory levels for semiconductors turning lower as previous stock adjustment efforts pay off. This contributed to a slight rebound in industrial production from September, including for electronics and semiconductors.
Private consumption (48% of GDP) expanded 2.1% in the first nine months of 2023. Further growth in household spending may be held back by weakened spending power and higher debt servicing rates. Household debt continues to remain elevated, reaching 100% of GDP as of third quarter of 2023, compared to 71% for advanced economies, and 47% for emerging markets.
Headline inflation continued to slow throughout 2023, and the deceleration in consumer price growth is expected to continue in 2024. But accumulated cost pressures, including a pickup in global energy prices, will likely brake on the disinflation momentum. This poses upside risk to the inflation outlook, which will make the Bank of Korea stay cautious on prematurely cutting interest rates. After a total of 225 basis point worth of rate hikes in 2022, the Bank of Korea only raised its policy interest rate once in January 2023 to 3.5%, the highest since the global financial crisis before embarking on an interest-rate hiking policy pause. The recent rebound in household debt prompted caution on the part of Bank of Korea. Hence, interest rates will remain restrictive as fighting inflation and bringing household debt level down are policy priorities despite growing expectations of a policy pivot by the Federal Reserve. Employment conditions have been supported by the recovery in the services sector, with one-quarter of new jobs created in 2023 from business and personal services, and the agricultural sector. This helped to keep the unemployment rate at a low level.
External account under pressure
South Korea’s external accounts will remain under pressure amid sluggish export performances. The current account (CA) registered a mere 1.3% surplus of GDP in the first three quarters of 2023 owing to a smaller goods trade surplus. The country, however, has large foreign exchange reserves, standing at $417 billion at the end of November 2023, the ninth-largest in the world. A slight expected improvement in export performance in 2024 should help to bring up current account surplus through a larger trade surplus.
The fiscal position has remained relatively healthy, but the Yoon administration is keen to enhance fiscal sustainability and rein in “excessive spending”. On a managed fiscal balance basis (which excludes revenue from the social security funds or SSF), the government posted a deficit of KRW 52.2 trillion in Jan-Oct 2023 period, which was already 90% of that year’s government deficit estimate of KRW 58.2 trillion (2.6% of GDP). This was mainly driven by a lower tax revenue amount due to weaker income and corporate taxes collected. The increase in the 2024 budget, which was approved by the parliament, will be the smallest in 20 years as authorities prioritised fiscal discipline. Nevertheless, the government projected that the deficit on the managed fiscal balance will widen from estimated 2.6% in 2023 to 3.9% of GDP on lower collected revenue and higher expenditures.
Partisan gridlock
President Yoon Suk-yeol was inaugurated on 10 May 2022, but has faced a divided political landscape. His party - the conservative People Power Party - does not enjoy a majority in the National Assembly, holding 112 out of 300 seats (38.5%), while the progressive Democratic Party of Korea (DPK) controlled 55.6%. As a result, Yoon’s political agenda, including proposed reforms to pension, labour and education, has stalled under the partisan gridlock. His muscular stance towards North Korea and China, and rapprochement with Japan has heightened the political divide. The next legislative election is in April 2024, and expected to be a close race as recent polls suggest that no party holds a comfortable lead.
