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South Korea Domestic Conditions Getting Worse at Faster Pace

What is worrisome is that the economy is feared to be entering a kind of “vicious cycle” leading to a slowdown in private spending, which in turn drags down the vitality of the overall economy
The unemployment rate hit an eight-year high of 4.2% in August.The unemployment rate hit an eight-year high of 4.2% in August.

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, Yonhap reported.

The country’s unemployment rate hit an eight-year high of 4.2% 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% on-month, following a 7.1% 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% in August, accelerating from the previous month’s 6.2% 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% to a record $11.5 billion, and petrochemical product shipments also hit a record $4.35 billion.

  Economy Losing Steam

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% 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.

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 last week to officially recognize that the downside risk to the economy is greater than previously estimated.

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.

 Growth Target Lowered

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

Last year, the economy expanded 3.1%. 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% from its earlier 3% projection.

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

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

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

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

  Gloomier Outlook

Recently, major foreign investment banks 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% late last month, from a 2.8% estimate a month earlier. The global investment bank also cut South Korea’s 2019 growth prediction to 2.7% from 2.9%.

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% from 3% as of end-July.

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

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