The external environment for South Korea’s export-oriented manufacturing sector improved slightly in February, according to data released on March 1st that showed a diminishing year-on-year decline in merchandise exports (in non-seasonally adjusted terms). However, recent forward-looking surveys on business conditions and consumer sentiment revealed falling manufacturing orders and weaker household spending capacity, indicating that the clouds over South Korea’s economy will not dissipate soon.

Two important trends revealed by recent trade and survey data are a plunge in semiconductor exports and weakening expectations for household disposable income, suggesting that a rebound in demand is unlikely to be in the offing. Semiconductors account for around one-fifth of South Korea’s total annual exports, but outbound shipments started to tank in the second half of 2022. Meanwhile, household disposable income is being squeezed by rising consumer prices and higher debt-servicing costs. The resulting slowdown in private consumption debilitated another important engine for economic growth.

We believe that exports of memory chips—the main semiconductor products manufactured and exported by South Korea—will remain weak in 2023-24 as a result of oversupply in the global market. On the demand side, the end of a global rush for remote-working equipment and home-entertainment devices during the covid‑19 pandemic coincides with slowing economic growth in major economies, which hurts consumer demand for mobile electronic devices. Such equipment and devices are the main source of demand for memory chips, and fading consumer enthusiasm for new purchases and upgrades will keep memory chip orders at low levels.

The decision of some South Korean memory chip manufacturers to ramp up production capacity to increase market share, despite projections of falling demand, did not help. Consequently, the glut of memory chips on global markets means that prices are unlikely to rebound. This will probably force South Korea chipmakers to reduce output eventually.

Similarly, domestic consumer spending will remain weak in the first half of this year. Although inflation has started to moderate, the deteriorating situation in the manufacturing industry—one of the biggest job providers in South Korea—will lead to rising unemployment. This in turn will raise income uncertainty and lead households to rein in discretionary spending. Surveys have already shown that households expect less consumption of entertainment, travel and eating out. 

The weak trade and survey data are in line with our forecast of another contraction in real GDP in the first quarter of this year. We believe that growth is unlikely to pick up substantially until near the end of this year. Our forecast of a 1.3% expansion in real GDP in 2023 still holds, but downside risks have risen.

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 identify prospective opportunities and potential risks.