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[Editorial] Slow growth trap

Structural problems hurt Korea’s growth rate amid sluggish exports

By Korea Herald

Published : Sept. 27, 2023 - 05:31

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South Korea’s growth rate is feared to dip below the Organization for Economic Cooperation and Development average for the third consecutive year this year, unless sagging exports rebound at a brisk pace.

The OECD maintained Korea’s 2023 growth outlook and inflation forecast at 1.5 percent and 3.4 percent, respectively, in its interim report titled, “Confronting Inflation and Low Growth.”

The interim outlook suggests there has been no meaningful change in the country’s economic situation since the Paris-based organization cut Korea’s growth outlook by 0.1 percentage point in June.

Given the recovery in other OECD countries in recent months, however, Korea’s growth rate is likely to fall below the average again, illustrating the possibility that the slow growth trend is a sign of deepening structural problems rather than a temporary weakness of its export-driven economy.

The country’s growth rate came in at 2.6 percent in 2022 and 4.3 percent in 2021 -- both figures below the OECD average of 2.9 percent and 5.8 percent, respectively.

Korea’s 1.5 percent growth outlook for this year is just above the OECD average of 1.4 percent. But the outlook for this year remains far from benign. As the latest interim report raised the growth outlook for some countries including the US (from 1.6 percent to 2.2 percent) and Japan (from 1.3 percent to 1.8 percent), the forthcoming outlook scheduled for November is expected to increase the average.

Citing sluggish exports and investment, the Finance Ministry, the Bank of Korea and the International Monetary Fund forecast the country’s growth rate would be 1.4 percent. The Asia Development Bank’s projection for Korea this year is 1.3 percent. And some investment banks suggest a 1.1 percent growth rate for this year.

Another problem is a gloomier outlook for next year. Although the OECD projected a 2.1 percent growth rate of Korea for 2024 in its interim report, some foreign investment banks said the country’s growth might be stuck within the 1 percent range for both 2023 and 2024.

The back-to-back 1 percent growth rate, if materialized, will come off as a strong alarm for Korean policymakers as it could push the country into a category of low-growth nations. Local media outlets cited experts saying that something should be done to reverse the downward trend, particularly given that Japan’s revised growth outlook of 1.8 percent for this year is now above that of Korea -- the first reversal in growth pace between the two rival countries since 1998 when the Asian financial crisis swept the region.

Experts say that the Korean economy’s struggle with slow growth is largely attributed to its structural limitations. The country has relied heavily on semiconductors as a key export item and focused on China, the biggest trading partner, as an export market. During the January-July period, China accounted for 19.6 percent of Korea’s total exports. Korea’s memory chips, in particular, depend on exports to China. But both the domestic semiconductor industry and the Chinese market continue to remain lackluster. As a result, Korea has recorded a trade deficit with China in August for 11 months in a row.

There is no doubt that China has been, and will continue to be important for Korean exporters. But the US is fiercely competing with China over global supply chains and advanced technologies, resulting in more trade restrictions. Korea’s heavy dependency on China and the country’s recent steps to firm up ties with the US pose a dilemma for policymakers here.

The protracted slump in exports and its resultant impact on growth are not what the Korean government had expected, as it earlier forecast that exports would stage a strong recovery in the second half of this year, following a “slow start” in the first half. To shore up the downward growth trend, policymakers must find a breakthrough in the challenging shifts in global trade and encourage companies to diversify their export markets.