South Korea's Technology-Fueled Economy Flashes Signs of Revival

  • Retail sales, business sentiment hint at improving outlook
  • Central bank expected to hold off from cutting rates further

South Korea may be turning a corner.

After months of gloom, recent data is hinting that the $1.4 trillion economy is beginning to emerge from a slump brought on by China’s slowest growth in 25 years and the outbreak of Middle East Respiratory Syndrome, or MERS, in May. 

The recovery is tentative, however. Consumer confidence and business sentiment are picking up. Tax cuts are luring shoppers into stores as part of a Korea Black Friday, a two-week version of the U.S. festive shopping period that began on Oct. 1.

Retail spending is back to levels seen before the MERS outbreak, the finance ministry said on Oct. 8. Exports are falling but showing hints of an improvement and industrial production is pointing to a rebound in activity.

Investors are warming up, too: Shares in technology giant Samsung Electronics Co. jumped the most in more than six years on Oct. 7 after earnings soared 80 percent in the September quarter. That performance beat estimates and raised hopes of a renewal in demand for the nation’s world-class technology.

“Korea’s domestic economy appears to be getting back on its feet,” said Krystal Tan, Asia economist at Capital Economics Ltd. “Exports remain a weak spot, but even there, some signs of improvement have emerged.”

While overseas shipments have fallen every month in 2015, hurt by China’s slowdown, an 8.3 percent fall in September was not as poor as analysts’ estimates because of a jump in European demand. More improvement is expected heading into the year-end holiday shopping season in Europe and the U.S., according to the trade ministry.

In another sign of improving sentiment, South Korea’s credit rating was increased one level by Standard & Poor’s last month, with S&P citing a sound fiscal position and relatively strong economic performance.

Together, the better fortunes could be enough to keep the central bank on hold when it meets on Oct. 15.

"Given signs of recovery, the Bank of Korea is unlikely to cut the rate in its October meeting," Goldman Sachs analysts Goohoon Kwon and Irene Choi wrote in a note on Oct. 8.

At their September meeting, policy makers kept the seven-day repurchase rate at a record low 1.5 percent, having cut four times since August 2014. 

Still, the economy that depends on demand for ships and steel, flat-screen TVs and semiconductors is far from out of the woods. Risks remain from China’s struggling economy as well as prospects that the Federal Reserve may lift interest rates over coming months, triggering a flight of capital from Asia.

Illustrating how much slack there is in the nation’s factories, the ratio of inventories to shipments for manufactured goods was 128 percent, close to the highest level since 2008. High inventories are the result of weaker demand for manufactured goods and are likely to weigh on production and investment as companies look to reduce their stockpiles rather than make more things.

There are other worries, too: lagging innovation, soaring corporate and household debt, rigid labor markets and an aging population all are expected to keep a lid on expansion.

Any recovery will probably remain subdued. The central bank has forecast gross domestic product may grow 2.8 percent this year, far below the average growth the economy enjoyed in the years before the global financial crisis. Finance Minister Choi Kyung Hwan told lawmakers on Oct. 5 that there are downside risks to the government’s 3.1 percent growth projection for this year.

“Korea’s economy continues to face headwinds, particularly on the external front, and low inflation suggests the central bank has scope to cut interest rates further,” said Tan of Capital Economics.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE