South Korea: World Growth Must Wait!
One of the brightest stars in terms of global growth unexpectedly faded, with South Korean GDP falling by 0.3% in Q1. Posting its worst performance in almost a decade
The economy grew by 1.0% in Q4, 2018 alongside an expected a rebound of 0.3% in the subsequent quarter. Hopes were dashed however due to weak foreign demand for South Korean exports and diminishing domestic consumption. Retail sales declined sharply in February due to the early celebration of the Lunar New Year. Apart from the seasonal factor however, there was also a structural weakening when compared to the average value for January-February with the same period last year.
When assessing the implications for the global economy, it should be noted that the country exported fewer semiconductor elements, refined petroleum products and passenger cars. Exports declined in February and fell short of forecasts in March, indicating a continuing trend towards weakening external demand during these two months. Sources of weak foreign demand arose from the largest trading partners, such as China, USA, Hong Kong and Japan, which is all well documented in their domestic data. Channels of transmission foreign demand slack into domestic consumption were capacity utilization, which contracted in March, deterring from expansion on business investments, as well as an increase in the ratio of inventories-to-shipments of the exporters.
Source: Korean Development Institute
Industrial production in February fell by 1.4% MoM, the service sector showed zero growth. In the medium-term trend, assessing the change in indicators in annual terms, the situation also looks alarming. Waning momentum in manufacturing and mining arose became especially distinct in early 2019 while the services sector has been stagnating for a long time.
Shares of companies producing semiconductor elements, amid the decline in exports, raise doubts about the rationality of valuation, as the price is rising while EPS falls
The South Korean government has pledged to increase fiscal momentum with an additional package of spending of $5.9 billion, in addition to the record budget set for 2019. According to their calculations, this will lead to additional GDP growth of 0.1% and creation of 73,000 jobs. With the failure of the first quarter, the government’s targets for 2.6% to 2.7% GDP growth are beginning to look excessively ambitious, unless, of course, a miracle occurs in export activity.
The country, with a high share of economic and implicit political power belonging to industrial conglomerates called Chaebol, ranks 11th in terms of the size of the economy and has been growing at one of the highest rates after the Great Depression.