South Korean's President Moon Jae-in on 100th March First Independence Movement Day - Photo by President Office

JAKARTA (TheInsiderStories) – The South Korean economy has been hit by a perfect storm of economic headwinds during 2019, including the United States (US) – China trade war, a sharp downturn in global electronics new orders, and the recent escalation in trade frictions with Japan.

Both South Korea and Singapore have recorded negative quarter-on-quarter (QoQ) GDP growth in the first quarter (1Q) of 2019 due to slumping exports and weak manufacturing output. The economic slowdown in both these highly export-driven Asian economies is an early warning signal of the mounting negative shockwaves to the export sectors of many Asian economies.

While domestic demand from private consumption and investment is still supporting growth momentum in many large Asian economies, notably China, India and Indonesia, many central banks across the Asia-Pacific region have eased monetary policy in recent months.

The wave of monetary policy easing across the Asia-Pacific region reflecting concerns about the impact of weakening exports on overall GDP growth, triggering rate cuts from the Bank of Korea, Bank Negara Malaysia, the Reserve Bank of Australia, the Reserve Bank of New Zealand, the Reserve Bank of India and Bangko Sentral ng Pilipinas.

South Korean exports have plunged in recent months, with Korea Customs Service data for the first 20 days of July showing that exports fell 13.6 percent year on year (YoY), reflecting slumping semiconductors exports, which fell 30.2 percent YoY. This follows a 13.5 percent YoY decline in South Korean exports in June 2019, with 2Q of 2019 exports down by 8.4 percent in annual basis.

South Korean GDP in Q1 2019 already posted a q/q contraction of 0.4 percent, with the annual pace of GDP growth moderating to 1.7 percent YoY. With the slump in exports continuing through 2Q and into Q3 2019, the South Korean economic growth is expected to slow significantly this year. South Korean GDP growth is expected to halve, from a pace of 2.7 percent in 2018 to just 1.4 percent in 2019.

While the Bank of Korea has taken action to try to stimulate the economy with a 25 basis points rate cut on July 18, monetary policy acts with long lags, so is unlikely to have much stimulatory impact on overall economic growth in calendar 2019.

If the US Federal Reserves cuts the Fed Funds Rate at the next week meeting at the end of July, it could open the door for further easing steps by the Bank of Korea. Some fiscal stimulus from the recent South Korean supplementary budget is also in the pipeline for the second half of 2019.

With economic growth momentum already slowing, the escalating trade tensions between Japan and South Korea have added to downside risks facing the South Korean economy in 2H of 2019. The negative impact to South Korea’ export sector from Japan’ export restrictions on key materials critical for the electronics industry add to the economic shocks from the US – China trade war and downturn in global electronics sector new orders, which have already hit South Korean exports.

South Korea is heavily reliant on imports of Japanese intermediate parts and materials for its manufacturing industry, having recorded a bilateral trade deficit in parts and materials with Japan amounting to US$15.1 billion in 2018 – around three-quarters of the total bilateral trade deficit. This highlights the vulnerability of South Korea’s manufacturing supply chain to Japanese intermediate goods, notably for electronics components and chemicals products.

If the Japanese government decides to remove South Korea from its ‘white list,’ this could substantially increase the negative impact of trade frictions with Japan on the South Korean economy.

by Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit