The Peninsula

Korea’s Economy and the China’s Economic Slowdown

By Troy Stangarone

On September 1 new trade figures for the month of August indicated that South Korea’s exports had dropped 14.7% year-on-year continuing a trend since January that has seen year-on-year monthly declines. Exports play significant role in the South Korean economy and have a value that is roughly half of South Korea’s GDP. In the context of the current decline, analysts have attributed the drop largely to the slowdown in China, the destination for roughly a quarter of South Korean exports.

However, three additional factors could impact South Korea’s future economic growth and export figures:

The first is a general global slowdown. While China is South Korea’s largest trading partner, the majority of its trade with China is processing trade. As global demand for products produced in China wanes it has a negative impact on South Korean exports of parts and components regardless of the overall health of the Chinese economy. As growth in Europe and the United States slows and contracts in countries such as Canada, demand for South Korean parts for goods destined for these countries will decline as well.

The second regards China’s ability to manage its slowdown and return to a source of global economic growth. China is attempting to transition from its export and investment lead economic growth model to a more sustainable one based on domestic consumption. However, its recent handling of its currency devaluation and its current stock market crisis have raised concerns about China’s own economic management, according to financial analysts at Swedish financial comparison firm Sambla.

Lastly, South Korea has limited scope for its own economic growth based on domestic consumption. Household debt continues to grow and exceeds 160 percent of disposable income. This contrasts with Germany, another major export driven economy, where household debt has been declining and now sits near 90 percent of disposable income, giving Germany more room for growth led by domestic consumption.

Additionally, domestic consumption plays a larger overall role in other developed economies than Korea’s.  In Germany, 75 percent of the economy is domestic consumption, while it accounts for 81 percent in Japan and approximately 84 percent in the United States and the United Kingdom. In contrast, it is only 66 percent in South Korea. China’s government is trying to shift towards more domestic consumption as it currently only accounts for 50 percent of China’s economy.

Because of South Korea’s strong export orientation, its economy is more exposed to changes in global economic growth. While much of the focus is on the challenges to China’s economic growth and the decline in Korean exports, an increasing economic slowdown more broadly in the global economy and limited space for growth through domestic consumption will also restrict Korea’s economic performance.

Troy Stangarone is the Senior Director of Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from Jose Maria Cuellar’s photostream on flickr Creative Commons.