The third-quarter economic growth data released by the Bank of Korea last Friday had both good news and bad news.
The good news is that Korea’s economic growth hit a five-year high in the July-September period. Korea saw its gross domestic product expand 1.2 percent on quarter, the fastest pace since the second quarter of 2010, when GDP grew 1.7 percent.
The third-quarter growth rate compares favorably with the 0.8 percent in the first quarter and 0.3 percent in the second quarter.
The GDP expansion in the third quarter can be seen as a “surprise” and led some analysts to suggest that the much-needed momentum for economic recovery has been created.
Yet it is premature to say that the economy has been put on a path to recovery because the fast pace of output growth could be short-lived.
The economy owes its expansion in the third quarter to a rebound in domestic consumption. The government introduced a set of pump-priming measures to spur household spending, which contracted in the previous quarter due to the Middle East respiratory syndrome outbreak.
It remains to be seen whether the pickup in consumer spending will be maintained in the fourth quarter and beyond. The government is determined to keep up the recovery momentum.
Yet there are structural factors that stifle consumption, such as the steady rise in household debt and the seemingly unstoppable surge in housing rental costs.
Now the bad news. The BOK data also showed that exports fell 0.2 percent on quarter in the July-September period after posting anemic growth in the preceding quarters — 0.1 percent in the first quarter and 0.3 percent in the second.
The woeful performance of exports should be taken seriously, as it implies that exports have ceased to be the main engine of growth for the Korean economy.
In the past, robust export growth contributed to the expansion of the national economy. Not anymore. Exports have become a drag on economic growth. In the third quarter, exports cut the overall economic growth rate by 0.1 percentage point.
The problem is more serious when we focus on exports of manufactured goods. The central bank tally showed that manufactured exports dropped 1.3 percent in the third quarter. This means that without an increase in services exports such as tourism, overall export performance could have been much worse.
What worries us is that the prospects for Korea’s manufactured exports are not bright. For one thing, the Chinese economy is slowing as the country pursues economic growth based on domestic demand rather than exports.
The global economy is also slipping into a much slower growth mode. Earlier this month, the BOK cut its estimate for the global trade growth rate for 2015 from the 3.3 percent suggested in July to 2.7 percent. It also lowered the estimate for 2016 from 4.1 percent to 3.2 percent.
More importantly, Korea’s key export items — electronics, vehicles, petrochemicals, ships, and iron and steel — have been gradually losing competitiveness in global markets.
To put the Korean economy on a solid path of recovery, policymakers need to find ways to sharpen the competitive edge of Korea’s export mainstays. Manufactured exports still matter for Korea.
At the same time, they need to expand the services sector, which has larger growth potential than manufacturing industries. In this regard, lawmakers are strongly urged to act on the government’s proposal aimed at developing key service industries.
