Slowdown in U.S., China raises concerns about Korean economy

The South Korean economy is on alert, with signs of an economic slowdown in the United States and fears of deflation in China next year.

Experts warn that Korea, which is heavily dependent on exports to the U.S. and China, may face challenges ahead, splashing cold waters on a gradual recovery in exports seen after a year-long slump.

The Chinese government announced various stimulus measures in the second half of this year, including an interest rate cut and reported economic indicators surpassing market expectations in August and September.

There are signs, however, that economic recovery is weakening again.

China’s Consumer Price Index (CPI) in November dropped by 0.5 percent from the same month a year ago, the second consecutive month of decline and the lowest since November 2020.

The Producer Price Index (PPI) also fell by 3 percent on year in November. The Purchasing Managers’ Index (PMI) for the manufacturing sector sank below the benchmark of 50 in October and November, raising concerns about deflation in China.

Recession fears are also spreading in the U.S. Citigroup Chief Executive Officer Jane Fraser recently said that “while we do not believe a rapid economic downturn is imminent, we do see a recession looming,” emphasizing that such a downturn could result from persistent inflation in the service sector, increasing debt, slowing global growth, and armed conflicts in Europe and the Middle East.

Jamie Dimon, CEO of JPMorgan Chase & Co, also stressed the need to prepare for a potential economic downturn, stating that “inflation could rise further and recession is not off the table.”

With signs of slowdown in Korea’s top two export destinations, concerns rise that Korea’s goal of achieving export growth in 2024 could be in jeopardy.

“China’s imports are recording negative growth, which is an indicator that China’s domestic market is still weak,” said Joo Won, director of economic research at the Hyundai Research Institute. “As there are still risks such as the possibility of higher energy prices, including crude oil, the export situation in the first half of 2024 is crucial for Korea to achieve growth in exports.”

Korea’s exports to China are on a decline but it still accounts for around 20 percent of its entire exports.

According to the Korea International Trade Association, China accounted for 19.5 percent of Korea’s entire exports in the first quarter of 2023.

However, due to the high concentration of semiconductor exports to China, the Chinese economy has a direct impact on Korean exports.

Kim Sang-bong, a professor of economics at Hansung University, in the meantime, noted that Korea’s dependence on China was once high but it has decreased significantly after going through Covid-19, suggesting that the impact of China’s deflation on the Korean economy may not be substantial.

There is some speculation that Korean monetary authorities could cut interest rates sooner rather than later if Chinese inflation continues to fall and the economy slows due to weak exports to China.

The market expects a rate cut in the second half of 2024 if inflation remains persistently high, but if the U.S. and China accelerate their rate cuts, it could be challenging for Korea to keep up, analysts said.

“The U.S. is signaling that there is no reason to keep interest rates high, and the same is true for China, where inflation is on the decline,” said Park Jee-hyeong, a professor of economics at Seoul National University. “If China rapidly adjusts interest rates, it could be an important consideration in domestic monetary policy decisions.”