After nearing a recession as growth slows and exports slide, South Korea is seeing hints of an economic recovery.
According to South Korea’s Finance Minister, industrial output, consumption, and construction investment are seeing steady improvement in April, indicating that the slowdown might have reached a bottom and a recovery could be on its way.
The ministry reported in its monthly report that private consumption rose 0.6% in the first quarter of 2015 on a quarter-over-quarter basis and 1.5% on a year-over-year basis. That is a strong increase from the previous quarter, and the ministry believes the consumer is spearheading growth. Department store sales, an important indicator of middle class Korean consumption, rose 1.5% in April, and credit card transactions rose over 15%.
An improvement in big-ticket item spending is another sign of stronger discretionary spending, as real estate saw house sales rise 30% from April 2014, a meteoric rise after an intense and fast slump a year ago. Car sales are also up, with domestic vehicle sales rising almost 3% in April on a year-over-year basis.
Economic Miracle Stalls
Once heralded as one of the Asian tigers, South Korea’s economic miracle has become a major part of the culture’s identity and a focus of both policymakers and the large chaebols, or family owned companies, that dominate the domestic economy and foreign exports. With stable GDP growth around 2% in the 2000s and a quickly rising per capita income, Korea was considered one of the most reliable and fast-growing economies of Asia.
After 2008, the country’s almost total avoidance of the global financial crisis reinforced the country’s reputation for reliable but high investment returns. While growth slipped to lower than -4% at the height of the crash in late 2008, it quickly recovered in 2009 and was over 3% in 2009, when the United States was still in recession.
However, the country’s economic might has been challenged in recent years, as economic growth decelerated and stalled in 2014 and early 2015 at just 0.9% at best and 0.3% at worst. Some analysts believe a Japan-style period of long-term deflation may hit the country, as demographic headwinds combine with stalled productivity growth to challenge the country’s development.
Japan Currency Hit
The largest headwind to South Korean growth has been the fall in Japanese yen, which has made the export-dependent country less competitive in foreign markets. While Korea and Japan compete in many sectors, such as household electronics, the latter has seen its currency fall in value by over 33% relative to the U.S. dollar since 2012, while the Korean won has remained relatively flat during the same time. This has made Japanese exports significantly cheaper to the U.S. market. Despite recent improvements, Korea’s Finance Minister still believes Japan’s weakening currency is a competitive threat to South Korea and it could continue to hinder growth in the future.
The Bank of Korea has also recently warned that cheaper yen are damaging the local economy. BOK Research Director General Chang Min said in an interview earlier this month that Korea’s exports have fallen because of the yen. "We already considered the weaker yen when making April’s forecasts, but a bigger-than-expected weakness could affect exports,” he said.