Gangnam City Seoul South Korea

South Korea’s economy faces growing headwinds

South Korea’s economy is losing momentum, as recent economic indicators depict weakening performance across the board. Trade data released by the Korea Customs Service on September 1st show merchandise export growth slowing to 6.6% year on year in August, in stark contrast to a 28.2% jump in imports. On the domestic front, industrial production, retail sales and equipment investment recorded simultaneous decline on a sequential basis in July, reflecting softening domestic demand.

Why does it matter?

The weak performance across a wide range of economic indicators bodes ill for economic performance over the second half of this year. Elevated global energy costs and a sharp depreciation of the local currency, the won, against the US dollar since the beginning of 2022 continue to lift the import bill and push up inflation. Meanwhile, rising living costs and interest rates will exert a dampening effect on household spending and business investment into 2023.

South Korea’s export-oriented economy is unlikely to find relief from external sources, as its main overseas markets face a period of slower growth. As a result, EIU believes that South Korea’s economic recovery from covid-19 shocks has already peaked in the second quarter of this year, with a period of modest economic expansion likely to follow into 2023.

Among South Korea’s 20 major export products, computers, mobile phones (and parts) and petrochemicals all recorded a double-digit year-on-year decline in August. This was the latest signal of waning global consumer demand, particularly for electronic devices, which will have knock-on effects on domestic industrial activity. Moreover, overseas sales of semiconductors–the country’s mainstay export category–decreased on a year-on-year basis for the first time since April 2020.

Combined with reports of increasing inventory and falling prices for microchips, this indicates that the semiconductor upcycle, which has been buoyed by rising business demand, may now be slowing. Conversely, secondary battery cells remained a bright spot for the external sector, with demand still underpinned by rising sales of electric vehicles. We expect these trends to persist amid elevated fossil-fuel costs and a global transition towards clean energy.

What next?

The subsiding external demand for South Korean manufactured products indicates strengthening headwinds for economic growth in the coming months. This will be compounded by persistent supply-chain disruption caused by China’s “zero-covid” policy, which we believe is unlikely to relent until at least mid-2023. We expect a period of slow growth to prevail in South Korea for the remainder of this year and into 2023. As a consequence, we will revise down our real GDP growth forecast for 2023, from 2.3% at present.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.