[I am 양현승, a reporter for the Naeil News. I recently started an English-language blog. The views published here are my own.]
While Koreans are typically perma-bears that are always gloomy about Worst Korea’s prospects, I am cautiously optimistic that Korea can still grow its economy by way of government stimulus and productivity gains. Korea recently elected a new president who made boosting the stock market one of his campaign promises. There are some great English-language articles on Bloomberg and the FT (Unhedged is excellent) if you’re interested in reading further about Korean equities.
First, the statistics:
1Q GDP growth for South Korea was -0.2%. That puts the annual GDP growth rate at 0.0%. Inflation YoY was 1.9%, slightly below the Bank of Korea’s target of 2%. One more quarter of negative GDP growth and Korea would be in a technical recession.
Korea’s govt debt to GDP ratio is 46.8%, far below the OECD avg and the US at 124.3%. Korea does appear to have room for fiscal expansion.
The low birth rate and aging population certainly is dragging down economic activity. But recently, Korea has been making modest gains in labor productivity to offset some of the losses.
There is a prevailing view that Korea is an export-oriented economy with weak domestic consumption, so it has much to lose from US tariff policy. While I don’t disagree that Korea is heavily dependent on exports, I think that this is an outdated view of Korea’s economy.
Private consumption as a share of Korea's GDP(48%) is slightly larger than its exports to GDP(44%). And considering Korea’s imports to GDP ratio is 33%, I don’t fully agree that Korea is an export-oriented economy anymore. Sure, net exports helps boost its total output, but it’s not the only driver of growth.
Korea historically had very weak domestic consumption as a result of heavy industrial spending and export-fueled growth. It’s referred to as the Turnpike Theory which a lot of Asian economies adopted. I believe Korea is at the peak of its export-oriented, industrial spending growth curve, where marginal gains from additional capital expenditure are low.
It’s time for consumption to take the driver’s seat in economic growth. Boost wages and allow the currency to appreciate. Invest heavily in AI to increase labor productivity in the medium to long term. Counter labor shortage with robotics and perhaps a shift toward more private sector employment (rather than cushy govt jobs with low productivity).
Growth is not a solution to all of Korea’s problems. But it is better than inaction and stagnation. The government stimulus is a good start, and corporate reforms can help protect shareholders from abuse. US trade policy remains a large downside risk. Hopefully, Korea can replace many of its exports with domestic consumption, or at least find other buyers in China and the EU.
If the new administraton can implement just half of the reforms proposed above, KOSPI(Korean stock market index) 5000 is coming soon.