Published : Sept. 13, 2016 - 14:36
A series of unfortunate industrial and economic events at home and abroad are weighing down on the South Korean economy, blasting hopes for recovery in the second half of 2016.
According to a report by LG Economic Research Institute on Tuesday, the Korean economy is highly likely to suffer sluggish consumption, exports and facility investment for the last four months of the year as the fourth-largest economy in Asia is recently hit by collapse of the country’s largest shipper, recalls of the newest Samsung large-size smartphone and some probability of a US rate hike later this month.
“Downward risks including the corporate restructuring moves are growing in the economy,” said Kang Joong-koo, a researcher at the institute. “The restructuring fallout would have greater impact on every corner of the economy in the latter half, which will call for additional policy support.”
Economic indicators in July, which provides a glimpse of economic trends for the rest half of the year, showed weaker performances on-month, according to data by Statistics Korea.
Industrial output shrank 0.1 percent compared to June, while retail sales slid 2.6 percent. Facility investments plunged 11.6 percent during the same period.
“All of these indicators turned out to be poorer than before, which is a clear sign for a stop in the recent recovery trend,” Kang said.
Private consumption is forecast to contract further in the coming months as a cut on individual consumption tax expired in June. After the tax cut end, automobile sales plummeted 11.6 percent in July from a year earlier. As a result, the growth in total retail sales 9 percent in June to 4 percent in July.
Although the government is planning to hold large-scale retail discount events, dubbed “Korea Black Friday” last year, in November, such repetitive event wouldn’t have as much impact as before, the report pointed out.
“Adding to that, implementation of the Kim Young-ran law is highly likely to have negative impact on consumption, especially taking a toll on diners, retailers and golf courses in the short run,” the researcher said, referring to a new anti-graft law that puts limits on spending for gifts and entertainment for some government employees, journalists and teachers.
The country’s exports are still expected to grow slowly after making a turnaround in August after posting declines for 20 months in a row.
Amid the growing uncertainties stemming from slower-than-expected recovery of leading economies like the US and China, global trade volume is estimated to shrink in the second half of the year with falling demand for Korean export goods, the report showed.
Korea’s ICT exports are predicted to take a serious blow from the battery defect in Samsung Electronics’ newest Galaxy Note 7 as 10 governments around the world, including the US, recommended their consumers suspend use of the new smartphone.
According to data compiled by the Ministry of Trade, Industry and Energy, ICT exports slid 2.1 percent to $14.1 billion in August, marking the 11th consecutive fall.
“Although the August fall slightly narrowed compared to the previous falls, prospects do not look bright for the coming months, considering the recent Galaxy Note 7 battery issue,” said an official at the Trade Ministry.
Burdened with both sluggish consumption and exports, local businesses are expected to cut back on their facility investments, the Lgeri report noted.
Manufacturing firms are highly projected to cutting investments in facilities for the time being in the midst of falling exports and dire growth outlooks,” it said.
A looming hike in the base fund rate by the Federal Reserve is also adding risks to the Korean economy that is saddled over 1.2 quadrillion won ($1.08 trillion) in household debt.
Theoretically, a US rate hike is expected to force the hand of Bank of Korea to hold its base rate at the current 1.25 percent a while longer. If foreign investors start pulling out their money from the Korean capital market as they go after a higher rate, the BOK will have to consider raising its rate to help stabilize financial markets.
“In theory, when talking about the lowest base rate, we should consider the risks of capital outflow,” said BOK Gov. Lee Ju-yeol at a press conference after the September monetary policy meeting last Friday. “A US rate increase and resulting strong dollar could raise capital outflow risks in emerging markets, and therefore Korea can consider raising the lowest effective level.”
As probabilities of a rate increase at the upcoming Federal Open Market Meeting slated for Sept. 20-21 were spiking, investor sentiment here turned sour Monday, sending the benchmark Kospi below the 2,000 mark, finishing at 1,991.48.
On Tuesday, the Kospi recovered to 2,002.76, up 0.54 percent as of 12:38 p.m. from the previous trading session, on remarks made by Fed Gov. Lael Brainard who urged prudence in deciding on higher rates.
By Song Su-hyun (song@heraldcorp.com)