The port of Ulsan, a key node in South Korea's world-class export infrastructure. Photo: Asia Times / Andrew Salmon

SEOUL – The International Monetary Fund (IMF) this week cut its gross domestic product (GDP) growth forecast for South Korea to 2.5%, down significantly from its March projection of 3%, in a telling reflection of a decelerating global economy.

The IMF’s projection is well south of that of the Bank of Korea, which anticipates a much more bullish 3.7%. The latest IMF estimate is also below those of credit-rating agencies Fitch and Moody’s, which both stand at 2.7%.

“Global growth is expected to slow significantly in 2022, largely as a consequence of the war in Ukraine,” the IMF wrote in its April World Economic Outlook publication. “The economic costs of war [in Ukraine] are expected to spread farther afield through commodity markets, trade, and—to a lesser extent—financial interlinkages.”

Food and fuel prices have already been impacted, the IMF added. Due to its muscular export sector, fully manned by an armory of global brands that operate in both the B2C and B2B spaces, South Korea is often seen as a leading weathervane for the wider world economy.

That would suggest that a Korean growth slowdown is bad news for countries beyond its own borders, as post-pandemic growth transitions to a deceleration phase.

South Korea charged through the Covid era. According to OECD data, it saw the best economic performance in the G20 in 2020 apart from China and Turkey. In 2021, previously struggling economies caught up, but South Korea maintained its growth lead over fellow top exporters Japan and Germany.

This galloping performance was mounted on the back of its key export, semiconductors – the components that represent the guts of a fast-digitizing global economy and which earn some 20% of South Korea’s export sector’s revenues.

The country boasts a world-beating eco-system down the Suwon-Pyeontaek industrial corridor south of Seoul, built around the two domestic memory chip colossi, Samsung Electronics and SK hynix.  

Samsung soared through the global pandemic as demand for semiconductors skyrocketed. Image: AFP

This deep pool of assets makes South Korea – along with Taiwan, home of key non-memory foundry player TSMC – one of the two pillars of the leading-edge international semiconductor sector.

Demand for chips – as well as mobile devices and other electronic gadgets which South Korea produces – surged due to the pandemic’s work and play at home trend.

The main culprit of the IMF’s gloomier outlook is the war in Ukraine, which has flung further fuel upon extant inflationary fires. The IMF hiked 2022’s year’s inflation outlook for South Korea to 4% from an earlier estimate of 3.1%.

On a monthly basis, Korean consumer prices soared 4.1% in March year-on-year – the first time in over a decade that consumer prices topped 4%, according to Yonhap news wire. That marked an acceleration from the 3.7% rise seen in February.

Even so, according to a February OECD estimate of the inflation rates of its 38 member countries, Korea is ahead of the pack. With a core inflation rate of 3.7%, it is doing a lot better than its peers in the “rich nations’ club”, which have an average rate of 7.7%.

However, all things being equal, South Korea is not only benefitting from global economic trends like digitization; it is also exposed to global economic vulnerabilities.

In stark contrast to its highly efficient export machine, South Koreans are at the mercy of an inefficient and therefore expensive agriculture and agricultural distribution sector.

But the country is also vulnerable to imported inflation: It is a net energy importer, and its metal-bashers must ship in capital goods and components to churn out exports including autos, petrochemicals, displays and ships, as well as chips and devices.

Officialdom is doing what it can to tame the price surge. The BOK raised its key policy rate by a quarter percentage point to 1.5% last week, marking the fourth hike in nine months.

However, there is another key dynamic that the BOK must constantly consider: A high level of household debts, a perennial Achilles Heel of the consumer economy.

The country’s household debt hit a record $1.56 trillion last year. That figure rose to 106.7% of GDP in the third quarter of 2021 – up from 105.8% of GDP in the second quarter of that year.

Another drag factor is the country’s Covid-19 situation.

A shopper walks along the alleyway of a market in Seoul on January 12, 2021. Photo: AFP / Ed Jones

Korea won global kudos for its early-phase, lockdown-free containment response, but reeled under a staggering caseload of Omicron cases this year. As a result, South Korea has fallen far behind other advanced economies in North America and Western Europe, and only ditched the majority of its social distancing restrictions this week.

That dynamic necessarily hammered consumer spending and added to the burdens of small business owners in the retail, food and beverage, hospitality and education sectors. But even if there is a consumer spending bounce back from Covid, the unholy duo of elevated inflation and household debt is expected to cut deep into private spending.

Weak domestic consumption would leave South Korea’s macroeconomy at the mercy of its export sector, selling to a global economy that is also stuttering in the face of fierce inflation headwinds.

When it comes to the global economy, the IMF is not sounding a note of confidence.

According to its report this week, “Global growth is projected to slow from an estimated 6.1% in 2021 to 3.6 % in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.”