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(News Focus) S. Korean economy at a crossroads

All Headlines 10:00 September 16, 2018

By Park Sang-soo

SEOUL, Sept. 16 (Yonhap) -- South Korea's dismal job conditions, coupled with weak domestic demand and feeble facility investments, are setting off alarm bells in Asia's fourth-largest economy that is at a crossroads of entering a downturn cycle or shaking off the short correction period and pulling off steady growth going forward, analysts say.

A series of data show that domestic conditions are getting worse at a faster-than-expected pace, as exports are acting as the bulwark for growth amid escalating trade friction between major economies.

The country's unemployment rate hit an eight-year high of 4.2 percent in August, and the number of newly created jobs rose by a meager 3,000, the smallest since January 2010, when 10,000 jobs were slashed in the aftermath of the 2009 global financial crisis, according to government data.

Some analysts predict that September may see the number of the employed decline even further, and a protracted slump in the automaking and shipbuilding sectors, stemming from a downturn business cycle and massive restructuring efforts, is raising concerns that the present sluggish market conditions may continue.

Facility investment, meanwhile, continued to decline in July, falling 0.6 percent on-month, following a 7.1 percent on-month drop in June and marking a decline for five straight months. Private spending is also at the risk of weakening amid economic uncertainties.

One bright spot for the economy has always been robust exports.

South Korea's exports increased 8.7 percent in August, accelerating from the previous month's 6.2 percent gain, amid concerns that a trade row between China and the United States -- Seoul's two big trading partners -- may hurt the country's outbound shipment.

Exports were mainly led by increased shipments of semiconductors and petroleum products. Chip exports rose 31.5 percent to a record $11.5 billion, and petrochemical product shipments also hit a record $4.35 billion.

Analysts say higher base effects might have made some data look poorer than expected, but what's really clear is that the economy seems to be losing steam.

"Last year's 3 percent growth was largely helped by the chipmaking industry ... but this year, its contribution has weakened and the economy may get on a long-term, downward path," says Lee Geun-tae, a researcher at LG Economic Research Institute.

Jobseekers look at recruitment notices during a job fair of foreign-invested companies at a convention center in Seoul on June 14, 2018, in this file photo.

Downbeat data are also affecting consumer sentiment here. Consumer confidence plunged to a 17-month low in August due largely to a sluggish job market, marking the third straight month that the index has headed south and the lowest number since March 2017.

Such gloomy data forced the Korea Development Institute (KDI) last week to officially recognize that the downside risk to the economy is greater than previously estimated.

"There is continued growth in exports despite a decline in employment on weaker domestic demand led by sluggish investment, implying that a rapid economic downturn is highly unlikely," the state-run think tank said in its monthly evaluation of the country's economic conditions.

Market analysts have said what is worrisome is that the economy is feared to be entering a kind of "vicious cycle" of poor job conditions leading to a slowdown in private spending, which in turn drags down the vitality of the overall economy.

In July, the South Korean government already trimmed its growth target to 2.9 percent for the year, from its earlier projected 3 percent, and sharply scaled back its job creation target to 180,000 from its earlier estimated 320,000.

Last year, the economy expanded 3.1 percent. The ministry's latest growth revision is on par with the Bank of Korea's growth forecast. The central bank had shed its growth estimate to 2.9 percent from its earlier 3 percent projection.

But there could be an increasing chance of the economy missing such forecasts given somber situations.

The country's gross domestic product (GDP) expanded 0.6 percent in the April-June period, slowing down from a 1 percent on-quarter increase in the previous quarter, according to preliminary data by the Bank of Korea (BOK).

The latest reading marks a slight decrease from an earlier estimate of a 0.7 percent gain in July. From a year earlier, the economy churned out a 2.9 percent expansion.

In order to meet the BOK's growth estimate of 2.9 percent for 2018, the economy has to pull off some 1 percent on-quarter growth in both of the next two quarters.

Recently, major foreign investment banks (IBs) have become gloomier about South Korea's 2018 growth outlook due to negative factors both at home and abroad.

According to the report by the Korea Center for International Finance, Goldman Sachs downgraded the growth forecast for Asia's fourth-largest economy to 2.7 percent late last month, from a 2.8 percent estimate a month earlier.

The global investment bank also cut South Korea's 2019 growth prediction to 2.7 percent from 2.9 percent.

Goldman Sachs is not alone. In a report released late last month, UBS lowered both of South Korea's growth forecasts for 2018 and next year to 2.9 percent from 3 percent as of end-July.

(News Focus) S. Korean economy at a crossroads - 2

Ju Won, a senior researcher at Hyundai Research Institute, claims that the Korean economy already entered a downward path last year.

"After hitting a peak in the second quarter of last year, the economy took a turn," he claimed. "Exports have been on a roll, but industrial polarization is deepening, and risks in emerging markets are also further fanning uncertainties."

Indeed, the South Korean economy is gripped by such external downside risks as the trade conflict between the U.S. and China, and financial instability sparked by some emerging markets.

The Seoul government said the strong global demand in the manufacturing and heavy industrial sectors, as well as rising oil prices, will positively affect the nation's exports in the latter half of the year.

However, a possibility of protracted trade disputes between Washington and Beijing and the rising volatility in the financial market ahead of the U.S. interest rate adjustment can exert downside risks, it warned.

In order to avert the worst case scenario, Seoul is looking at the option of fiscal stimulus. The government earlier proposed a record 471 trillion won (US$422 billion) in the budget next year, with a focus on creating more jobs and facilitating prodding innovative growth.

In particular, a record 24 trillion won in budget will be earmarked to boost job creation.

The government's wishful thinking is that the mega budget spending may help private consumption and will likely reduce any downside risks to economic growth next year.

Finance Minister Kim Dong-yeon has stressed flexibility in implementing the Moon Jae-in government's iconic policies, such as income-led growth and a hike in the minimum wage, which critics say are some of the main causes for gloomy jobs data.

Park Sang-hyun, an analyst at Leading Investment & Securities, predicted that the data for September and October will be crucial in gauging whether the economy is really on a downward path or not.

"Some numbers regarding the manufacturing sector and business and consumer sentiment are showing signs of a rebound," Park says. "It is too early to say that the economy will get back on track, but it could signal that the manufacturing segment could avoid a further slowdown."

Containers carrying goods are stacked on the piers of South Korea's largest port city of Busan on Jan. 1, 2018, in this file photo. (Yonhap)


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