[Yoo Choon-sik] Shaky export prospects and weak domestic demand

South Korea posted a sixth consecutive month of growth in exports during March over a year earlier, official data showed last week, led by a surge in sales abroad of big-ticket items such as semiconductors and ships. This fueled the projection that the country’s economic growth would pick up this year after suffering a below-trend reading last year.

Exports in March rose 3.1 percent from a year earlier to $56.5 billion, according to the data compiled by the Ministry of Trade, Industry and Energy. By product, exports of chips jumped 35.7 percent and the delivery of ships soared 102.1 percent, respectively, whereas overseas sales of electric vehicles and rechargeable batteries dropped by more than 20 percent.

The rebound in exports bodes well for Asia’s fourth-largest economy, as the government predicts the country’s economic growth will accelerate to 2.2 percent this year after having suffered growth of just 1.4 percent in 2023, which marked the worst showing in the country’s modern history, excluding crisis periods.

Despite the positive reading in exports for March, some analysts warn the country’s export growth may reach its peak soon instead of continuing to accelerate for the rest of this year, as the economies of South Korea’s major export destinations are widely expected to experience slowing momentum in the coming months.

In addition to the fact that March exports were less than the market’s expectation of 5.2 percent growth in a survey of analysts conducted by the Reuters news agency, the stellar performance of a few cyclical items such as information technology goods and ships overstated the overall strength of global demand, analysts point out.

For instance, exports during the first quarter grew 8.3 percent on-year, marking the strongest gain since the second quarter of 2022. But excluding semiconductors and ships, overseas shipments during the January-March period dropped 0.3 percent after a 2.4 percent rise in the preceding quarter, according to calculations from government data.

In other words, exports this year have been driven by a few cyclical items while most other products such as petrochemicals and industrial machinery, which are directly related to the strength of the global economy, experience weakening demand from abroad. In March, for instance, exports of eight out of the 15 major products declined.

A report by Hanwha Investment & Securities even warned that South Korea’s export growth could reach its peak as early as May, before gradually losing momentum for the rest of this year. Although South Korea’s exports would still manage to avoid slipping back into a declining pace, the brokerage predicted growth in overseas shipments would be modest.

The cautious prediction on exports comes at a time when South Korea’s domestic demand remains weak, as both interest rates and inflation are expected to remain high for an extended period. South Korea’s consumer price inflation in March held steady from February at an annual rate of 3.1 percent after picking up from 2.8 percent in January.

It remains far above the central bank’s target of keeping the inflation rate around 2 percent in terms of a medium-term average. As inflation refuses to come down quickly, consumers have increased their expectations for the future pace of price growth to 3.2 percent in the central bank’s March survey from 3 percent seen in both February and January.

Stubbornly high inflation has prompted market players to push back the expected timing of the Bank of Korea’s first interest-rate cut, thereby dampening consumer sentiment. The central bank’s economic sentiment index fell to 92.7 in March after adjustment for cyclical factors, the lowest since April 2023, from 92.9 in February.

Despite all these signs of a sustained slump in domestic demand, the government has been all but hesitant in introducing stronger boosting measures, apparently out of fears of an adverse impact on the fight to contain inflation and on the government’s campaign to tame the growth in government debt and household borrowings.

But the government needs to keep in mind that timing is more important than anything else when it comes to economic policy. Focusing too much on reducing everything could lead to a contraction in the overall economic output, which would further worsen various ratios measured against economic output.

Furthermore, the domestic sociopolitical situation is in a negative spiral. The latest public opinion polls suggest the ruling camp will find it difficult to win a majority in the April 10 parliamentary election, and conflicts over the government’s plan to sharply boost medical school admission quotas cause anxiety among consumers.

The government’s "corporate value-up" program has yet to win full confidence among investors both at home and abroad, while the construction industry remains in a slump as investors still feel uncertain about project-financing loan-related problems, and the government appears all but hesitant in introducing further boosting measures.

I believe the government is looking at various scenarios and has multiple sets of possible policy measures at hand. What is most important, however, is not the ability to fix every problem in one stroke, but the confidence among companies and consumers that the government is ready to make the right choice at the right time.

By Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.