Despite May fall in Korea’s exports, prospects remain for strong GDP rebound

South Korea’s exports, which showed signs of recovery in April, plunged 9.4% again because of the exacerbated US-China trade war and falling memory-chip prices. Nevertheless, the Korean government and some experts say the economy is in better shape in the second quarter than in the previous one.

However, annual growth is unlikely to meet the 2.5% forecast by the Bank of Korea or the 2.6-2.7% predicted by the government, as the BOK revised down the first-quarter GDP growth rate to 0.4% from 0.3%

The BOK’s forecast of 2.5% is attainable only if the economy continues to grow by more than 1% month on month for the remaining three quarters respectively. As external conditions such as the US-China trade dispute are not favorable, experts predict that it will be difficult to sustain growth of more than 1% every quarter.

The government and some experts believe that, despite some unstable monthly economic indicators, the country’s GDP is likely to post a sharp rebound in the second quarter thanks to the government’s expansionary fiscal policy and base effect.

At the moment, it is difficult to expect robust growth led by the private sector, but they see that it is not a time to worry about an economic recession, either.

Trade war, falling chip prices

According to the Ministry of Trade, Industry and Energy, the value of South Korea’s exports totaled US$45.91 billion in May, down 9.4% from a year earlier – which was worse than a 2.0% decline in April. Imports fell 1.9% to $43.64 billion. As a result, the trade balance posted a surplus of $2.27 billion, extending its surplus streak to 88 straight months.

By item, the value of exports of semiconductors plunged 30.5% because of falling unit prices and base effects, while petrochemicals also fell 16.2% on weak demand from China. Cars, on the other hand, rose 13.6%, and exports of electric vehicles, in particular, jumped 58%. Ship exports also rose 44.5%. By region, exports to China plunged 20.1% in the wake of the US-China trade war.

Lee Sang-jae, an economist at Eugene Investment & Securities Co, said on Tuesday in a telephone conversation with Asia Times that he was surprised to see the export performance from May 20-31. “Exports usually increase in the end of the month. But during the period of May, daily exports posted only $2.1 billion from an average of $2.3 billion in the first four months of this year. A GDP growth rate as low as near 2% seems to be visible,” he said.

However, an official at the Ministry of Finance said to Asia Times that “the economy was improving in the second quarter from the first quarter. retail sales in April decreased due to the base effect, but the level of the index is quite high showing an improving trend.”

Retail sales fell 1.2% in April after a surge of 3.5% in March when air purifiers and dryers sold well because of an exacerbated fine dust problem. However, the retail sales index for April came to 111.4, higher than 108.5 in the first quarter.

“We cannot rest assured of the future economic trend as external conditions such as the US-China trade war are worsening,” he said. “We need to wait and see the May index as the current slump in exports can negatively affect manufacturing production in May and consumer sentiment in May is also dampened again due to intensifying trade disputes between the US and China.”

The government expects GDP growth to be 2.6-2.7% this year, but with the Q1 growth having fallen to a minus level, it is likely to make a slight downward revision in late June when it announces the economic policy direction for the second half. The Bank of Korea recently revised down its growth forecast by 0.1% to 2.5%.

“The economy is improving in the second quarter,” another official at the ministry said. “The second-quarter growth rate could reach the 1% range despite sluggish exports.”

Export statistics announced by the Industry Ministry are money-based figures, which were walloped by the fall of memory-chip prices. But export statistics reflected in GDP are quantity-based. Besides, since GDP counts net exports, the difference between exports and imports, if the quantity of imports decreases more than exports, they contribute to growth. For this reason, the GDP contribution of net exports stood at 0.2% in Q1 despite a fall in exports.

Korea’s GDP declined by 0.4% in the first quarter mainly on a sharp fall in the contribution of government spending, a significant factor in the growth in Q4 of last year. The government drew up an expansionary budget as well as a supplementary budget worth 6.7 trillion won (US$5.67 billion). But execution was poor, especially in social overhead capital investment for public use facilities in the sports and recreational sectors.

The government is trying hard to expand its spending. It also increased basic pension payments and expanded the coverage of health insurance from April, which could contribute to boosting consumption.

“It’s true that the economy is improving in the second quarter from the first quarter, but I don’t know how much it will improve,” an economic expert said. “If we talk about GDP, it will depend on how much the government plays.”

Another expert at a government-run think tank said, “The reason why the growth rate was so high in the fourth quarter of last year was that the various effects of government spending were reflected. If we estimate the growth rate based on monthly indicators showing up and down, there may be a surprise in the second quarter growth rate.” He added, “The government can do quite a lot because we still have a month left until the second-quarter GDP comes out.”

However, the expert said the potential sharp rebound in the GDP growth rate does not mean a meaningful change in the economic trend.

“We tend to overestimate the rise and fall of the economic indicators, but in fact, the Korean economy doesn’t change that much,” he said. “The first-quarter GDP decreased sharply as the contribution of government spending sharply weakened, but it’s not that bad because it grew 1.7% year on year. The same could be true of May’s exports. We haven’t analyzed them in detail yet, but I don’t think there’s a big change in export and import trends for now.

“The Korean economy has been growing at a rate of 2.5-2.6% in recent years, and its potential growth rate has been gradually declining,” he said. “Except the time when housing boom caused by the government policy and semiconductor boom contributed to the growth, the trend has remained intact.”