The impacts of a decelerating global economy continue to weigh heavily on South Korea’s growth prospects. Weak export growth, lackluster domestic consumption, and high household indebtedness are stifling the economy’s potential upside. In Q2 2012, GDP grew a mere 0.4 percent over the previous quarter, down from 0.9 percent in Q1 2012. The outlook for the third quarter is not favorable either; the economy may experience near-zero-percent quarter-over-quarter GDP growth. The growth forecast has been revised downward on several occasions in the recent past, and current projections range between 1.5 and 2.5 percent for 2012.
Despite a decline in exports, South Korea achieved a $2.8 billion trade surplus in July 2012. However, the surplus was a staggering 40.6 percent lower than it was a year earlier. The export sector benefitted from increased overseas demand for automobile parts and display panels, but shipments of telecommunication devices plummeted. In the first 20 days of August 2012, the tables have turned. Korean exports fell 12.4 percent from the previous year, resulting in a trade deficit of $4.5 billion. The country’s exports have contracted in five of the first seven months of 2012—a testimony of the country’s vulnerability to the Eurozone crisis. Exports account for over half of South Korea’s GDP, and persistent weakness in the export sector could have a multiplicative impact on the overall economy.
Meanwhile, the Korean Trade Commission admitted that some of South Korea’s industries have been hit due to the Korea-EU Free Trade Agreement (FTA), which took effect last year. While trade between the two regions is expected to benefit over the long term, cheaper pork and wine imported from Europe have adversely impacted local businesses. The affected companies will now receive low-interest loans and financial support. The recent turn of events could subject future FTAs to additional scrutiny and potentially result in delays. South Korea, China, and Japan are likely to launch the three-way free trade talks in November this year; however, formal negotiations are not likely to begin until next year. Moreover, free trade negotiations between China and South Korea are expect to continue for the next two years with extensive negotiations on sectors considered sensitive to either country.
On the other hand, employment has enjoyed a favorable trend. South Korea’s jobless rate fell to 3.1 percent in July and reached a five-month low as over 470,000 new jobs were added to the market. Individuals aged between 15 and 29 seem to have benefitted to some extent; the jobless rate among youth fell by 0.4 percent to 7.3 percent. While the services sector witnessed the largest increase in employment, the mining and the manufacturing sectors saw modest increases. Yet the trend in consumption spending is at odds with the trend in employment. Sales of departmental stores and discount stores contracted in June and July 2012, marking the first such consecutive monthly decline since May 2007. Weak retail data highlights the overall weakness in the consumer sector and does not bode well for growth prospects during Q3 2012. Furthermore, South Korea’s consumer sentiment index fell below the benchmark level of 100 for the first time in seven months and maintained its three-month downward trajectory.
South Korea’s economy has failed to recover as expected. Overdependence on export-led growth has left the economy vulnerable to global macroeconomic uncertainties.
Several factors could be responsible for lackluster performance in private consumption. First, consumers are extremely concerned about future employment prospects, despite the current trend. The current spike in jobs is largely driven by low-income jobs, and a significant proportion of young graduates struggle to find suitable jobs. Second, household debt reached record levels and exceeded 160 percent of disposable income. As a result, households may be weary of accumulating additional debt, especially for consumption purchases. Finally, concerns that the economic slowdown could result in a fall in asset prices could have further discouraged consumers.
South Korea’s economy has failed to recover as expected. Overdependence on export-led growth has left the economy vulnerable to global macroeconomic uncertainties. Furthermore, domestic consumption is unlikely to compensate for the persistent decline in external demand. An improvement in the employment situation is the silver lining amid gloomy economic data and could potentially help households retire some of their outstanding debt obligations. While the country’s economic stability does not face any immediate risks, the outlook for growth is relatively weak.