COMMENT: South Korea is global barometer

by Canadian Shipper

Forecasters are downgrading the outlook for South Korea, underscoring the risk that a global slowdown may be in store, with Asia at the epicenter. That makes South Korea worth watching.

Only six months ago, some believed that South Korea could grow by 6% this year, drawn along by higher exports to China. But growth forecasts for 2004 are

So far, Korea’s exports have remained very strong, with year-over-year growth in July at 38%. Exports to China are growing at a rate in excess of 50%, and now account for some 19% of Korea’s foreign sales. Indeed, China has surpassed the U.S. as the top destination for Korea’s exports. Assuming China’s efforts to moderate its economic growth succeed, some easing in Korea’s export growth is likely to emerge. However, overall export growth will probably remain solid despite this exports to Europe are up 42%, and to the U.S. by 26% in the past year.

The main reasons for concern about Korea’s outlook are domestic in nature. Korea’s recovery from the 1997-98 financial crisis was built largely on a series of structural reforms, including a strengthening of the banking system through higher capital ratios and the reprivatization of equity acquired by the government during the crisis. This forced private companies to turn to capital markets, producing a major increase in breadth and depth in the bond and stock markets. One by-product was a major improvement in financial ratios throughout the economy; another was a big expansion of the small-firm sector, which now accounts for around half of GDP; a third was the liberalization of the credit card market, which helped finance a boom in consumer spending. The problem is that the consumer boom became alarming in mid-2003, and the authorities took action and caused a slowdown in domestic spending that has carried over into 2004.

On top of this, high oil prices are proving to be a significant drag on Korea, the world’s fourth-largest oil importer. Imports of oil amounted to 3.2% of Korea’s GDP in 2003, and even though import volumes are declining, the oil bill is up nearly 15% in 2004 compared to last year. Even slower domestic demand growth will emerge if oil prices do not subside significantly. Moreover, high oil prices will also moderate the Chinese economy, which will soften Korea’s exports.

The good news is that the reforms of 1998-2002 have almost certainly increased the resilience of the South Korean economy to such external shocks. And there is every reason to believe that an easing in oil prices would have an almost immediate positive effect on spending. Furthermore, in the background, the political clouds blowing over from North Korea seem a little less dark than in the past. Relations appear to be warming, although they remain prone to set-backs.

The bottom line? South Korean growth should still average 5% in 2004-05. But Korea’s unique dual dependence on imports of oil and exports to China makes it like a canary in a coal mine it will help us monitor how oil and China are impacting the outlook for the global economy.

Stephen Poloz is the Senior Vice-President and Chief Economist for Export Development Canada. His column appears every Friday on He can be reached at

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