[Editorial] Mixed outlook

For South Korea, a nation heavily dependent on exports, the continued slump in key export items such as semiconductors casts a dark cloud over its economic prospects for the second half of this year.

Attention is now turning to the second-half economic plans and projections the government will announce next week.

Ahead of the crucial announcement, Finance Minister Choo Kyung-ho hinted at the government’s policy focus. The country will strive to revive exports, stimulate investment and maintain price stability, Choo said before a closed-door meeting with officials Wednesday.

Choo acknowledged that while inflation has slowed and the job market remains relatively robust, Korea’s exports continued to decline due to the challenging external environment.

In May, Korea’s overall exports declined for an eighth consecutive month, with a 15.2 percent year-on-year drop to $52.24 billion. This decline was driven by a staggering 36.2 percent decrease in semiconductor exports, reflecting the weakening global chip demand.

Given that semiconductors accounted for nearly 20 percent of the country’s exports last year, the lackluster demand for chips has a big negative impact, especially regarding the outlook for the second half of this year and beyond.

Choo, however, expressed confidence that the overall economy would improve in the latter half of 2023.

As far as consumer sentiment is concerned, the new signals are clearly positive. According to the Bank of Korea, the composite consumer sentiment index rose to 100.7 in June, the highest level in 13 months. A reading above 100 indicates that optimists outnumber pessimists.

The positive reading seems to be driven by the acceleration of post-pandemic activities and a decrease in inflation, as well as expectations of economic recovery.

But the key question is whether exports will indeed rebound in a way that powers the overall economic growth momentum in the coming months, and the latest projections are mixed. The BOK data released Wednesday suggests the road ahead is unlikely to be smooth, as the country’s net terms-of-trade index for goods fell by 2.8 percent last month compared to the same period a year earlier. It marks a drop for the 26th consecutive month, as export prices fell faster than import prices.

Also on Wednesday, the Korea International Trade Association, a trade lobby group, projected that the country’s trade deficit will persist in the second half of this year before staging a “U-shaped” recovery in the long term.

KITA forecast that Korea’s exports will decrease by 3.1 percent on-year to $322.7 billion in the second half of the year while imports will drop by 12.4 percent on-year to $323.9 billion. It said a trade deficit would reach $1.2 billion in the latter half of this year.

KITA’s full-year projections are not optimistic, either. Exports are projected to decrease by 7.7 percent to $630.9 billion compared to the previous year, while imports are forecast to fall by 9.7 percent to $660.5 billion -- translating to a trade deficit of $29.5 billion for 2023.

Korean exporters hold mixed views about exports. In a survey released by the BOK on Monday, 56.3 percent of 343 manufacturers said exports may recover by the end of this year, while 43.7 percent projected only a partial recovery in exports from next year or later. In particular, more than half of respondents from the semiconductor industry are pessimistic, saying that exports will not recover even in the second half of 2024.

But government officials are sanguine about a recovery in trade. For instance, Trade Minister Lee Chang-yang said Tuesday that the trade balance for June, to be announced on July 1, is expected to improve, even floating the possibility of a surplus.

The actual outcome is likely to fall somewhere in the middle. The mixed projections underscore the obstacles faced by Korean exporters in the global market saddled with a string of uncertain factors such as the war in Ukraine. Policymakers are required to map out more forward-looking steps to beef up the competitiveness of Korean exporters and address the structural issues related to the country’s extended trade deficit.