Slow U-shaped recovery is forecast for Korean economy

[Source: The Hyundai Research Institute]

Anticipations of a potential shift towards economic recovery in South Korea this quarter are gaining traction. However, concerns loom over the delayed revival of domestic demand attributed to high interest rates, as indicated in a report released on Thursday.

The Hyundai Research Institute’s report suggests that external factors, including the U.S. Federal Reserve’s pivot to a potential rate cut and deflation in the Chinese economy, might steer the Korean economy towards a gradual U-shaped recovery rather than a swift V-shaped one.

The report underscores the vulnerability to unforeseen external shocks, potentially leading to a decline in exports, with consumption and investment failing to act as stabilizing factors. The specter of an L-shaped economic scenario, characterized by a loss of momentum in the economic cycle and a prolonged slump, is not entirely dismissible, the report warns.

Examining cyclical indicators, the report notes that concurrent indicators, reflecting the current economic state, bottomed out at 99.6 in December of the previous year, showing a marginal rise in January. Meanwhile, leading cyclical indicators, predicting the future direction of the economy, have been on a steady ascent since reaching 98.6 in April the previous year. Despite concerns, the export economy is displaying signs of recovery, buoyed by favorable conditions in the U.S. market, semiconductor export rebound, and base effects from the preceding year. Although February witnessed a 2.4 percent decline in exports to China, overall exports increased by 4.8 percent year-on-year, marking the fifth consecutive month of growth.

The report highlights the potential weakness in the recovery of the domestic market, attributing it to a contraction in real purchasing power due to high interest rates. While the Composite Consumer Sentiment Index (CCSI) saw a slight increase to 101.9 last month, marking the second consecutive monthly rise, the Consumer Sentiment Index (CSI) for living conditions remained at 94, significantly below the benchmark. The report explains that despite households maintaining optimistic expectations for the future economic situation, real purchasing power has not been substantiated, with real wages experiencing a 1.1 percent decline last year.

Rising import prices, driven by exchange rate factors, also raise concerns about inflationary pressures linked to agflation resulting from domestic climatic factors. Import prices turned positive in January, and producer prices witnessed an increase. While the Business Survey Index (BSI) is showing improvement, and the equipment investment adjustment pressure, a leading indicator of equipment investment, has been positive for six consecutive months, the institute’s analysis suggests that actual equipment investment continues to stagnate.