This photo provided by Samsung Electronics Co. shows the company’s semiconductor production facility in Pyeongtaek, south of Seoul. (Image courtesy of Yonhap)
SEOUL, Dec. 17 (Korea Bizwire) — Growth projections for South Korea’s export-dependent economy in 2024 have been revised downward, despite robust semiconductor exports, reflecting slower-than-expected recovery in domestic demand amid high interest rates and lingering effects of the COVID-19 pandemic.
Earlier in the year, both the South Korean government and major international financial organizations projected economic growth of around 2.4 to 2.6 percent for Asia’s fourth-largest economy, citing robust export momentum driven by an upswing in the chip industry cycle and strong external demand.
The projection marked a significant acceleration from the 1.4 percent growth recorded in 2023, the lowest since the 0.7 percent contraction posted in 2020 amid the pandemic.
However, as the year progressed, growth forecasts were revised downward to around 2.2 to 2.3 percent, reflecting sluggish domestic demand, which had been expected to improve later in the year.
“Growth is expected to reach 2.2 percent in 2024, supported by strong semiconductor exports, while partially offset by a weak recovery of domestic demand,” Rahul Anand, chief of an International Monetary Fund (IMF) team, told reporters after an annual meeting with South Korean officials in November.
South Korea, which heavily depends on exports for its growth, experienced a sharp recovery in outbound shipments following two years of trade deficits caused by weakened global demand for semiconductors.
In November 2024, the country’s exports achieved on-year gains for the 14th consecutive month, along with 18 straight months of trade surpluses, fueled by the semiconductor sector’s recovery, according to government data.
“The high growth rate has been sustained since exports began recovering in the fourth quarter of last year,” said Cho Sang-hyun, an analyst at the Korea International Trade Association (KITA). He added that export momentum is likely to continue for some time.
KITA data revealed that exports accounted for 98.6 percent of the country’s economic growth up until the third quarter of 2024, underscoring the economy’s heavy reliance on outbound shipments.
In 2024, inflationary pressures also have been relatively contained largely due to stable domestic food prices and easing global energy prices, following years of significant inflationary challenges in the post-pandemic era.
Consumer prices, a key measure of inflation, surged 5.1 percent on-year in 2022, marking the highest increase in decades. This was followed by a 3.6 percent increase in 2023.
In November 2024, consumer prices rose by less than the Bank of Korea (BOK)’s 2 percent target for the third consecutive month. The central bank now projects an annual inflation rate of 2.3 percent for 2024.
Despite strong export performance and signs of stabilization in consumer prices, domestic demand has not recovered as quickly as anticipated.
In November, the finance ministry’s latest monthly economic report, Green Book, excluded the phrase “signs of domestic demand recovery” for the first time in seven months.
The Korea Development Institute, a state-run think tank, has echoed similar concerns in its economic assessment since late last year, noting that declining retail consumption continues to limit overall economic recovery.
“When domestic consumption declines, businesses delay new investments, leading to job losses. This, in turn, creates a vicious cycle of less consumption and investment declines,” said Kim Jeong-sik, an economics professor from Yonsei University.
In November, while the country saw a slight uptick in overall job growth, the manufacturing sector alone shed nearly 100,000 positions.
“The manufacturing sector serves as a key indicator, reflecting trends in domestic demand and exports,” said Suh Woon-ju, an official at Statistics Korea, noting that manufacturing jobs have been declining for five consecutive months.
Small business owners in South Korea remain under significant strain, with rising delinquency rates attributed to the lingering economic effects of the COVID-19 pandemic.
“Credit quality, particularly of loans to SMEs and self-employed business operators, continues to deteriorate, reflecting weak recovery from the pandemic downturn,” said Sumio Ishikawa, a lead economist at the ASEAN+3 Macroeconomic Research Office (AMRO).
In a long-awaited policy pivot to shore up economic growth, the monetary policy committee of the BOK cut its key interest rate in October, marking the first reduction in 38 months. It was followed by an unexpected back-to-back rate cut in November.
In 2024, the country’s fiscal deficit also continued to widen due to a decline in tax revenue, primarily driven by lower corporate income taxes as businesses experienced poor operating income in the previous year.
“Continued efforts are necessary to ensure fiscal sustainability,” Ishikawa said, adding that it is crucial to strengthen fiscal discipline and implement measures to enhance revenue and restructure spending.
(Yonhap)
