The Korean economy grew at an even faster pace than had been estimated in the first quarter, the result of a strong upward revision in construction growth. Nonetheless, the economy was already showing signs of a slowdown in the second quarter, with industrial output on a much weaker footing in April on account of subdued manufacturing production. In addition, plummeting Chinese tourist arrivals down 61.5 percent year-on-year in May following China’s ban on group tours to Korea in March is likely to dent service activity this quarter.
Increasingly protectionist policies adopted by the U.S., a potential hard Brexit, and financial instability in China pose major risks to Korea’s external sector going forward. FocusEconomics Consensus Forecast panelists expect exports to increase 9.7 percent this year. For 2018, analysts expect export growth to decelerate and see shipments expanding 4.1 percent. Exports increased 13.4 percent from the same month last year in May, totaling $45 billion. This was down from April’s nearly six-year high of 24.2 percent. A sharp drop in export growth of vessels drove the overall decline, offsetting increases in the export values of semiconductors and petroleum products, which were aided by higher export prices. Imports, on the other hand, rose slightly from a 17.3 percent year-on-year expansion in April to 18.2 percent rise in May, totaling $39.1 billion.
As a result of slower growth in exports and faster expansion in imports, the trade surplus was reduced from the same month of last year. The trade surplus stood at $6 billion in May, down from $6.7 billion in May 2016. The result prompted the 12-month trailing trade surplus to total $87.3 billion in May, which was a drop from $88.1 billion in April.
Meanwhile, the new administration unveiled a $10 billion supplementary 2017 budget in early June, one of the main promises made during the campaign trail by now-President Moon Jae-in.
The additional budget, which is expected to be largely financed by using this year’s extra tax revenue, aims at creating 110,000 jobs by the end of 2017 through a mix of direct hiring and subsidies to SMEs.
Although the external sector’s stellar performance has provided some relief, economic growth is expected to moderate in the months to come as construction investment cools and households become increasingly constrained by weaker real income growth. FocusEconomics panelists expect GDP to expand 2.6 percent in 2017, which is up 0.1 percentage points from last month’s forecast. In 2018, the economy will also grow 2.6 percent. Citibank upgraded its earlier projection on Korean economy’s growth this year to 2.9 percent from 2.6 percent ahead of the Korea Development Institute which had the Korean economy growing 2.5 percent but upgraded it to 2.8 or 2.9 percent.
The optimistic projections counted on the global economic recovery, boosting Korea’s exports and expanded investments in the construction projects around the world.
The Bank of Korea’s forward-looking business confidence indicator (BSI) for the manufacturing sector eased from 84 points in June to 80 points in July, marking the lowest reading since February. As a result, the indicator is now further below the 100-point threshold and signals pessimism among the majority of Korean businesses.
Looking at the results in detail, business sentiment among both export- and domestic-oriented firms deteriorated markedly in July. The former reflected a declining value of oil-related exports, while the latter stemmed from ongoing doubts regarding households’ massive debt burden. Business’ view on sales and profitability took a hit in July, while a small improvement in companies’ assessment of raw material prices did little to offset the overall decline.
FocusEconomics Consensus Forecast panelists expect fixed investment to expand 4 percent in 2017, which is up 0.4 percentage points from last month’s forecast. In 2018, the panel expects growth in fixed investment to increase 2.3 percent.
May’s reading included the greatest decline in output since November 2016. Respondents blamed underwhelming levels of new business for the drop. Input costs decreased in April as international commodity prices remained low, leading to a modest drop in output prices. Respondents also cited that output prices were lowered to spur demand. Weakness in demand from China weighed down on new export orders, which fell for the 12th consecutive month.
Subsequently, manufacturers reduced their staffing levels for the ninth consecutive month but May’s reduction was marginal and the weakest since January. Lower new orders enabled manufacturers to work through existing orders, but purchasing activity continued to fall in May. Paul Smith, Senior Economist at IHS Markit, commented that “wider industrial production will trend towards stagnation in Q2 following an unexpectedly strong start to the year.”
FocusEconomics Consensus Forecast panelists expect fixed investment to expand 4 percent in 2017, which is up 0.4 percentage points from last month’s forecast. In 2018, the panel expects growth in fixed investment to grow 2.3 percent.
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