Pacific Money

Troubles in the EU, America and China Cause Concern in S. Korea

Why a Eurozone in crisis, a weak U.S. recovery, and a slowing China all spell trouble for South Korea.

One of the main success stories of recent years, and indeed of globalization in general, has been the dynamic economy of South Korea.  Driven by exports and the impressive performance of companies such as LG, Samsung and Hyundai, Korean growth has seen the country become an important regional and international economy with a commensurate expansion in cultural influence across East Asia.

As with many export driven economies though, recently South Korea has faced an increasingly worrisome slowdown.  Like many of its regional neighbours, South Korea has suffered growth forecast downgrades for this year and next.  A host of recent indicators highlight the problem. GDP growth has slowed to levels not seen since the financial crisis.  Private consumption remains weak and capital investment actually fell in the second quarter of this year. 

S. Korea, like other export driven economies, is facing the combined effects of the Eurozone crisis and recession, weak recovery in the United States, and the continuing slowdown in its large neighbour China.  Even as Samsung has posted record profits, and as employment continues to remain fairly strong (unemployment for September was at 3.1%), concerns about the future continue to grow.

On October 11th, the country’s central bank – The Bank of Korea (BoK) cut its base interest rate to 2.75% (following an earlier cut in July). The debate over whether further monetary action is desirable goes on.  In addition to these monetary moves, the government has this year outlined further stimulus amounting to roughly USD$12 billion.  However, as with other major world economies, upcoming political pressures (the South Korean presidential election is to be held in December) present the country with a certain degree of policy constraint.  It is not only China and the United States which are facing the difficult combination of economic troubles during a sensitive time for leadership. 

For Korea, much depends on whether economic policies enacted elsewhere are successful or not.  If the European Union manages to sort out its crisis (optimism on this front is low), if the United States manages to deal with the impending “fiscal cliff” without too much further disruption, and if China moves ahead with a much anticipated miracle stimulus, then the outlook for South Korea becomes much more comfortable.  These are all fairly big “ifs” though, and it is not easy for Seoul to wait and see how things go elsewhere.  South Korea has been described as a “minnow” between two “whales” (Japan and China). The minnow is no longer so dominated, yet it still must rely on other, larger economies, even if some of them are much farther afield.