[Journalism Internship] GDP to hit 12-year low on weak exports, demand

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[Journalism Internship] GDP to hit 12-year low on weak exports, demand

Published: 22 Nov. 2024, 11:32

Elderly job seekers attend a job fair in Yeouido, western Seoul, on Oct. 26, 2023. South Korea’s aging population is contributing to long-term economic challenges as the working-age population declines. [YONHAP]

Jeong Yeongho, Kim Seohyun, Park Soyoon, Shin, Eunho

Korea is set to record its lowest GDP ranking since 2012 this year, with its yearly growth forecasts likely to be downgraded due to weaker-than-expected exports and delayed domestic demand recovery.

This outlook stands in sharp contrast to the optimism seen earlier this year, when Korea logged robust quarterly growth of 1.3 percent for the January-March period, which raised hopes of sustained economic expansion.

Since 2020, Korea’s GDP ranking has gradually slipped, moving from 10th place to 13th as of last year — its lowest position in over a decade.

This year, the country’s economic growth is expected to fall short of the government’s initial forecast, with Korea currently ranked 14th as of the first quarter, according to data from Investopedia, which recorded the nation’s nominal GDP at $2.3 trillion.

The downturn in the ranking has raised questions about the country's economic resilience and the effectiveness of its current growth policies.

In the third quarter, Korea’s economy expanded by a mere 0.1 percent, falling significantly short of the Bank of Korea’s (BOK) initial projection of 0.5 percent for the period.

This underperformance has prompted both the central bank and the Ministry of Economy and Finance to review and adjust their growth projections for the remainder of the year.

During an Oct. 24 press briefing with G20 leaders in Washington, Finance Minister Choi Sang-mok acknowledged the growing downside risks for Korea’s economic outlook in light of the preliminary third-quarter figures.

Choi hinted at the potential for a downward revision of the annual growth forecast, which he said will be formally addressed in the government’s December economic policy direction announcement.

Previously, both the BOK and the Finance Ministry had forecast a growth rate of 2.5 percent for the year, targets that are virtually no longer achievable.

Adding to the cautionary tone, the state-run National Future Institute projects a modest 2 percent growth rate for Korea this year, which falls below the anticipated global average growth rate of 3 percent.

According to the central bank, the primary drivers behind this economic slowdown include reduced semiconductor exports and a downturn in major export sectors, particularly the automobile industry.

Korea’s semiconductor exports, a crucial component of the nation’s economy, have been affected by weakening demand from key markets, including China, which has traditionally been one of the country’s largest trading partners. Additionally, labor strikes at auto parts suppliers and reduced demand for electric vehicles have accelerated the decline in Korea’s automobile exports. Together, these factors have posed significant challenges for the export-driven economy.

Amid slower growth projections, the BOK faces growing pressure to consider interest rate cuts as a means of stimulating economic activity.

However, with household debt nearing a staggering 1.87 quadrillion won ($135 trillion), the central bank is treading cautiously. Lowering rates could exacerbate household debt issues and potentially fuel asset bubbles, adding complexity to the BOK's monetary policy decisions.

Household debt has been a pressing concern, especially within the mortgage sector. The rise in mortgage loans across Korea’s five largest banks has been substantial, increasing month after month. In April, mortgage loans rose by 4.34 trillion won, followed by a 5.32 trillion won increase in May, 5.85 trillion won in June, and 7.6 trillion won in July. August marked the peak of this upward trend, with mortgages rising by 8.91 trillion won. Following the implementation of measures such as interest rate hikes and loan-tightening policies, September’s increase was moderated to 5.91 trillion won.

As of the end of October, the total balance of mortgage loans at Korea’s five largest banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — reached 575.67 trillion won, marking an increase of 1.92 trillion won from the previous month.

Across the board, the balance of household loans in Korea reached 732.8 trillion won last month, an increase of 1.11 trillion won from September.

Adding to these challenges are persisting uncertainties in the foreign exchange market that continue to pose challenges to the export-driven economy as well.

“The won-dollar rate is at a much higher level than we initially wished, and the speed of the appreciation was also very steep,” noted BOK Gov. Rhee Chang-yong on Oct. 27, adding that the exchange rate will be “considered during the next rate setting meeting” in November.

As internal and external uncertainties persist, concerns are mounting over Korea’s short- and long-term growth prospects.

In the longer term, Korea is struggling with structural problems in the domestic economy due to a low birthrate and an aging population. As the working population decreases, domestic productivity declines and the economic growth rate inevitably slows.

A report from the Korea Chamber of Commerce and Industry (KCCI) found, "the domestic economy's potential growth rate, from around 4.7 percent in the 2000s, has entered the 1 percent range as of last year.”

The report attributed the significant decrease in labor's contribution to growth to “the impact of the low birthrate and aging,” and by 2040, the potential growth rate is expected to fall to 0.7 percent, according to the KCCI.

In response, the government has recently introduced a dynamic economic road map centered on three pillars: strengthening the innovation ecosystem, ensuring fair opportunities and enhancing social mobility.

As part of this strategy, Finance Minister Choi announced during the National Assembly’s recent Planning and Finance Committee audit of government affairs that a comprehensive “Future Generation Vision and Mid- to Long-Term Strategy” will be unveiled in December, further reinforcing the government’s commitment to sustainable growth.

BY JEONG YEONGHO, KIM SEOHYUN, PARK SOYOON, SHIN EUNHO [[email protected], [email protected], [email protected], [email protected]]