Low growth becomes new normal for Korean economy

A container ship departs a port in Busan, Sept. 21. Yonhap

By Yi Whan-woo

A slow pace of growth of around 2 percent or lower is feared to have become the new normal for the Korean economy, as the spillover effects of China’s economic downturn, high energy prices and soaring interest rates deal a heavier blow to exports and private spending here, according to analysts, Sunday.

The gloomy observation comes as Asia’s fourth-largest economy is anticipated to grow below the average of the Organisation for Economic Co-operation and Development (OECD), a group of the world’s wealthiest countries, for the third straight year in 2023.

After increasing 4.3 percent in 2021 and 2.6 percent in 2022, Korea’s gross domestic product (GDP) is anticipated to grow 1.5 percent in 2023, according to the OECD’s interim world economic outlook released last week.

In comparison, the average growth of the 36 OECD member states was 5.8 percent in 2021 and 2.9 percent in 2022.

The Paris-headquartered organization did not update the average 2023 GDP forecast for its member states last week, while projecting 1.4 percent growth in its latest outlook in June.

According to sources familiar with the matter, the OECD is anticipated to revise up its outlook in the next scheduled report in November, possibly by 0.3 percentage point or more.

The sources noted that the OECD’s 2023 global growth forecast was revised up 0.3 percentage point to 3 percent and also up 0.3 percentage point to 3.1 percent for the G20 economies.

“Under the circumstances, the Korean economy is considered to be faring well if it can barely achieve a potential growth rate of 2 percent in the coming years,” said Joo Won, deputy director of Hyundai Research Institute.

Ha Joon-kyung, a Hanyang University economics professor, said, “Korea can be said to be at a stage of low growth considering its pace of economic expansion is slower than the world’s as well as other developed countries.”

The professor noted that a slowdown is being witnessed in many advanced economies. He, nevertheless, said “the case is too extreme for Korea because it is overly dependent on China for exports.”

China accounted for 19.6 percent or $357.5 billion of Korea’s exports in the first half of 2023. The rate was down compared to previous years, but it is still the highest among Seoul’s trading partners.

In particular, China was the destination for 45 percent of Korea’s memory chips exported in the January-July period, which was worth $25 billion.

“The stumbling Chinese economy correspondingly dents Korea’s exports,” Ha said, citing OECD data that showed Korea’s exports in July decelerated at the fourth sharpest pace among the OECD member states.

Korea's outbound shipments shrank 15.5 percent in July from a year earlier, after Norway that saw a 50.2 percent decrease, and Estonia that suffered a 19.4 percent decline, and Lithuania with a 16.4 percent fall.

A signboard at a gas station in Seoul shows gasoline priced at 1,898 won ($1.42) per liter and diesel priced at 1,768 won, Sunday.

Concerning private spending, analysts said a resurgence in global oil prices is resulting in higher costs of production, which in turn increases the prices of goods and ends up denting consumer sentiment.

The prices of three crude oil benchmarks _ Dubai, Brent and West Texas Intermediate (WTI) _ are approaching $100 a barrel this month, after breaching that level during the first months of the Russia-Ukraine war last year.

According to Korea National Oil Corp.’s Opinet website, the price of Dubai crude rose to a new annual high of $95.56 on Sept. 15, while Brent and WTI also advanced to their respective new highs _ $94.43 and $91.48 _ on Sept. 18.

“High oil prices are worrisome, as they will put upward pressure on consumer inflation and restrict Korea’s twin growth engines of exports and private spending,” Joo said.

The high key interest rate of 3.5 percent, which marks a 14-year high, adds pressure on private spending, according to Joo, as households are burdened by debt repayments and end up spending less.

He noted the U.S. Federal Reserve’s hawkish rate pause last week can pressure the Bank of Korea (BOK) to deliver an additional rate hike and thus affect consumption.