World Economic outlook - South Korea Economic Forecast 2012-2013 ; United States businesses sold nearly $40 billion worth of goods to South Korea last year, a record volume. Over the first three quarters of 2011 we’re running 13 percent above last year’s pace, so South Korea is a very good customer. American exporters need to understand the outlook for South Korea’s economy in order to make business plans and consider contingencies.
I’m not a specialist in South Korea, but a client recently asked for a briefing on three key exports markets. I’ve previously published my economic outlook for China and economic outlook for Japan. This is the third and final installment in the series.
South Korea had good growth in 2010 and is enjoying decent economic growth in 2011. The most common economic forecast is for continued moderate growth in the coming years, but there are certainly some issues to be concerned with:
Export markets
Value of the won
Inflation
North Korea
Export markets for South Korea look good in the base case, but are at risk of a European recession. The largest foreign customers are China (30 percent of exports), United States (11 percent), European countries in the aggregate (11 percent), Japan (6 percent), with most of the remainder of the top trade partners being Asian. It might appear that Europe is a minor risk to South Korea, but remember that China, the United States and Japan all have a significant trade exposure to the EU. Thus, South Korea has both a small direct exposure and a large indirect exposure. If Europe melts down in a financial crisis, then South Korea will certainly feel the heat.
The value of the won has risen from its 2009 depths but remains below 2007’s levels. Further increases in the won would reduce the country’s trade competitiveness. The won has probably been depressed by fears over North Korea’s belligerence. Should Europe manage through its current crisis, international investors are likely to sell the safe-haven currencies and push up the value of the won (among other currencies). A really sharp increase in the won’s value seems unlikely, but some moderate appreciation is quite probable—if Europe muddles through.
Inflation has been stubborn and thus a continuing concern for South Korea’s policymakers. The Bank of Korea, the nation’s central bank, has set an inflation target of three percent, plus or minus one percentage point. Inflation has just been brought down from five plus percent to a hair under four percent. Inflation fighting is necessary work but always carries the risk of going overboard and triggering a recession, or not going far enough and allowing inflation to rise so high that a recession is needed to tame inflation. We expect the country to keep inflation in check, but we’re keeping our fingers crossed.
North Korea poses a major economic risk for South Korea. As this article is being written, Kim Jong-il has just died and his son, Kim Jong-un, appears to be ascending to power. Little is known about internal politics in the north, whether Kim Jong-un has the power to control the country or whether the military will install its own leader. Even if we knew who would be running the country in the coming years, we would be clueless about their approach to foreign relations. International policy could be the same, more bellicose, or friendlier. As a result, this issue is a great unknown hanging over South Korea and worrying potential investors in the country. Peaceful resolution of the conundrum would spark a boom in the South Korean economy.
The outlook for South Korea’s economy is positive if the two greatest risks are avoided: European collapse and conflict with North Korea. American companies doing business in South Korea should establish base case plans for moderate growth, with contingencies for the downside possibilities. In this country, however, contingency planning for a recession is probably different from contingency planning for armed conflict. The former is absolutely vital for companies selling to South Korea, and the latter is important to companies with physical facilities in the country.
I’m not a specialist in South Korea, but a client recently asked for a briefing on three key exports markets. I’ve previously published my economic outlook for China and economic outlook for Japan. This is the third and final installment in the series.
South Korea had good growth in 2010 and is enjoying decent economic growth in 2011. The most common economic forecast is for continued moderate growth in the coming years, but there are certainly some issues to be concerned with:
Export markets
Value of the won
Inflation
North Korea
Export markets for South Korea look good in the base case, but are at risk of a European recession. The largest foreign customers are China (30 percent of exports), United States (11 percent), European countries in the aggregate (11 percent), Japan (6 percent), with most of the remainder of the top trade partners being Asian. It might appear that Europe is a minor risk to South Korea, but remember that China, the United States and Japan all have a significant trade exposure to the EU. Thus, South Korea has both a small direct exposure and a large indirect exposure. If Europe melts down in a financial crisis, then South Korea will certainly feel the heat.
The value of the won has risen from its 2009 depths but remains below 2007’s levels. Further increases in the won would reduce the country’s trade competitiveness. The won has probably been depressed by fears over North Korea’s belligerence. Should Europe manage through its current crisis, international investors are likely to sell the safe-haven currencies and push up the value of the won (among other currencies). A really sharp increase in the won’s value seems unlikely, but some moderate appreciation is quite probable—if Europe muddles through.
Inflation has been stubborn and thus a continuing concern for South Korea’s policymakers. The Bank of Korea, the nation’s central bank, has set an inflation target of three percent, plus or minus one percentage point. Inflation has just been brought down from five plus percent to a hair under four percent. Inflation fighting is necessary work but always carries the risk of going overboard and triggering a recession, or not going far enough and allowing inflation to rise so high that a recession is needed to tame inflation. We expect the country to keep inflation in check, but we’re keeping our fingers crossed.
North Korea poses a major economic risk for South Korea. As this article is being written, Kim Jong-il has just died and his son, Kim Jong-un, appears to be ascending to power. Little is known about internal politics in the north, whether Kim Jong-un has the power to control the country or whether the military will install its own leader. Even if we knew who would be running the country in the coming years, we would be clueless about their approach to foreign relations. International policy could be the same, more bellicose, or friendlier. As a result, this issue is a great unknown hanging over South Korea and worrying potential investors in the country. Peaceful resolution of the conundrum would spark a boom in the South Korean economy.
The outlook for South Korea’s economy is positive if the two greatest risks are avoided: European collapse and conflict with North Korea. American companies doing business in South Korea should establish base case plans for moderate growth, with contingencies for the downside possibilities. In this country, however, contingency planning for a recession is probably different from contingency planning for armed conflict. The former is absolutely vital for companies selling to South Korea, and the latter is important to companies with physical facilities in the country.
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