What’s happened?

The worst of a downturn in external demand for South Korean goods appears to have passed. Data released on October 1st show that the year-on-year decline in merchandise exports narrowed to 4.4% in September, from a decrease of 8.4% in August, marking the smallest contraction in a year.  Measured in US dollars, export value was close to the recent highs reached in December 2022 and March 2023, while remaining 14% below the peak recorded in March 2022. 

Why does it matter?

The improving export performance will generate positive repercussions in South Korea’s economy, in which goods exports account for 40% of nominal output. The country’s important role in global supply chains for memory chips and refined petroleum products mean that its outbound shipment data are also considered a measure of the strength of the global electronics and industrial inputs trade. Increasing South Korean exports in these two product categories during July-September indicate that global trade is on a recovering trajectory.

The resurgence in exports of semiconductors and petroleum products is a promising sign that the drag on the local economy from tepid external demand will soon come to an end. Both export categories have reported double-digit sequential growth in the past two months, benefiting from the recent release of new electronic handsets and recovering industrial and transport demand in Western markets. EIU expects that ongoing export growth for these products will deliver a return to annual growth in South Korea’s goods exports from October, with positive secondary effects felt through industrial production and employment.   

There are persistent headwinds for global trade, however, which are largely blowing from the US and China. The determination of the Federal Reserve (the US central bank) to tame inflation thoroughly means that interest rates will stay elevated for a long period; we forecast no rate cut in the US until July 2024. The lagged impact of aggressive monetary policy tightening will dampen consumer spending and probably result in an economic contraction in the US in the final quarter of this year, causing collateral damage to South Korean exporters. Similarly, demand in China is unlikely to enjoy a robust rebound in the coming quarters, as the Chinese authorities remain cautious about the deployment of fiscal stimulus. Meanwhile, trade and technology conflicts between the two countries continue to pose a risk of disruption to global supply chains, within which South Korea is an important nodal point.

What next?

The latest South Korean trade data indicate that global demand for industrial inputs is improving and offer an incipient sign of recovery in electronics trade. These trends are likely to continue in the coming months and to propel a recovery in global trade. 

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.