A rapidly ageing population and sagging domestic demand: the outlook for Korea’s economy looks grim
As recently as June, the IMF was predicting that South Korea’s economy would grow by a robust 5.5% in real terms this year, while around the same time the OECD was revising up its 2006 growth prediction for the economy from 5.1% to 5.2%, citing improved conditions in the global information technology industry along with strong growth in China, now South Korea’s largest single market.
But economists like Andrew Reynolds, South Korea country head of CLSA Securities in Seoul, no longer buy that story. “We have a more negative view,” Reynolds told Emerging Markets. CLSA has revised its growth projection for South Korea in 2006 to 4.5% and all the way down to 3.4% for 2007 [against a government forecast of 4%].
He expects to see growth in both the US and China tailing off, which is not good news for South Korea’s still highly export-dependent economy. “Japan is OK, but Korea is a net importer from Japan,” so continued high growth in Japan will not compensate for slower demand from other economies to which Korea is a net exporter.
Assistant director of the IMF’s Asia and Pacific department Joshua Feldman nevertheless argued recently in Seoul that South Korea’s prospects remain “bright”, despite escalating oil prices and a strengthening of the won against the currency of its major competitor, Japan, and against the US dollar. Growth will slow in the current half year but not dramatically, Feldman suggested.
Reynolds cites more micro factors. “Capital expenditure by the chaebols [South Korean industrial and trading conglomerates] has come down because they take a dim view of the global economy,” he says. Because leading companies such as Samsung, Hyundai and the LGP group are seeing their “margins squeezed”, the earnings of South Korea’s myriad small and medium-sized enterprises will also be squeezed, he adds.
Some economists fear, meanwhile, that Korea’s real estate “price bubble” – which has driven up values by 30% over the past three years – may be due for a burst. The fact that the benchmark Kospi stock index is down by some 3% this year is also seen as a negative portent, although it has more to do with government anti-corruption actions against Hyundai and others than the macroeconomy, analysts say.
In March, officials brought Hyundai into a probe of a prominent business lobbyist, Kim Jae-rok, who was accused of bribing officials and politicians and arranging unlawful bank loans while coordinating mergers. Hyundai and Kia merged eight years ago, and their joint chairman, Chung Mong Koo, was indicted along with Kim. This is one reason why the Kospi index continues to trade at a discount of 15-20% to other Asian stock markets, according to CLSA’s Reynolds.
The government has other things to worry about, however. South Korea’s aggregate birth rate has dropped to 1.08 last year, an all-time low, and population growth dipped down to less than 200,000 for the first time, according to a recent report by the Korea National Statistical Office. At the other end of the scale, Korea has a population that is ageing even faster than that of Japan.
None of this bodes well for the increased domestic consumption needed to offset South Korea’s heavy reliance upon exports, economists say. A government report earlier this year warned that failure to implement drastic restructuring efforts would stunt growth, allowing competitors to overtake Korea.—AR