[Editorial] Lurking beneath fragile data

Korean economy narrowly avoids recession in Q1; it is no time to stick to rosy outlook

South Korea’s economy skirted a recession in the first quarter of this year -- by a narrow margin. Exports weakened, investment slowed and the growth outlook darkened amid the increasing uncertainties of the global economy.

The economy expanded a mere 0.3 percent in the January-March period, compared with the previous quarter, according to the data of the Bank of Korea. Given that it had contracted by 0.4 percent on-quarter in the October-December period, the plus figure may offer a hopeful sign for policymakers who feared a recession -- normally defined by two consecutive quarters of contraction.

But things are not so peachy. The share of exports in the country’s economic growth remained in the negative range for four quarters in a row, with the latest Q1 figure down to minus 0.1 percentage points.

Exports went up 3.8 percent on-quarter in the first three months of this year, pulling off a turnaround from a 4.8 percent contraction in the previous quarter, but a look at the broader picture of export trends suggests negative conditions for Korean exports.

Case in point are the shock waves reverberating through the Korean economy, sparked by slow demand for semiconductors, a core export item. Samsung Electronics, the world’s biggest memory chipmaker, announced Thursday its chip business suffered a deficit of 4.58 trillion won ($3.42 billion) in the first quarter, its first financial loss in 14 years, as a result of lackluster demand for chips across the world.

Reflecting weak demand, Samsung said earlier this month that it would cut chip production “to a meaningful level,” which came off as a signal that it faces a supply glut. Samsung said the global semiconductor market is forecast to shrink 6 percent this year, a bleak outlook that casts a cloud over the country’s chip exports.

Another worrisome sign is that an increase in domestic consumption played a big role in steering the quarterly growth figure into the positive range. Domestic consumption tends do play a bigger part in growth as the economy advances. But the problem lies in the limited size of the domestic market, and whether consumption will stay strong remains unclear.

Adding to the worries is that facility investment fell to a four-year low of minus 4 percent in the first quarter. Some experts warn that this downward trend should be taken seriously, as the nation had witnessed a similar pattern in facility investment during the 1997 Asian financial crisis.

The country recorded a trade deficit for 13 consecutive months in March, the longest streak of negative readings since 1997. The cumulative trade deficits this year amounted to nearly 50 percent of the total trade deficits recorded last year.

As Korea posted a current account deficit for the second straight month in February, the Korean currency is coming under intensifying depreciation pressure. The domestic foreign exchange market has been wobbly in recent months due to the wide gap in interest rates between Korea and the US, as Korea's central bank has stopped raising rates for fear of triggering an economic slowdown.

The continued weakening of the Korean won is blamed on external economic factors, but the downward pace is a cause for concern. The BOK released data on Thursday showing that the country’s dollar-denominated deposits rose to $84.33 billion in March, up $180 million from the previous month. Analysts said that such increases suggest that Korean exporters predict the value of the US dollar will go up against the local currency in the coming months.

The US dollar, which traded at around 1,250 won in early February, has been on the rise in the past weeks. It surpassed 1,341 won during trade hours Thursday, amid deepening concerns about a capital outflow related to foreign investors’ flight to safety and the ongoing slowdown of the Korean economy.

The Yoon Suk Yeol administration earlier predicted the economy would begin to recover from the second half of this year. Given the latest data, however, it is time for the government to ditch this rosy view and prepare for the worst-case scenario.

By Korea Herald(khnews@heraldcorp.com)