Slowing pace: A pedestrian passes by a shop in the Dongseongro district in Daegu, South Korea. Fears of serial failures of small businesses in various sectors cast dark clouds over domestic demand in the country. — Bloomberg
WHILE South Korea’s economy appears to sustain growth thanks to robust exports of a few big-ticket items, a slew of statistics released in recent weeks point to a deepening slump in domestic consumption. Against this backdrop, policy authorities seem to lack both the will and the tools to change course.
Statistics Korea’s retail sales index fell 2.9% in volume terms during the second quarter of this year compared to the same period in 2023, marking the worst drop in 15 years since the first quarter of 2009, when the world was reeling from the ripple effects of the US subprime mortgage crisis.
Understandably, consumers are under pressure, as both inflation and interest rates have remained elevated for a long time, while their income has not increased fast enough to keep up with the rising cost of living.
Fears of serial failures of small businesses in various sectors also cast dark clouds over domestic demand going forward.
Adding to the troubles facing consumption-oriented businesses, big eCommerce platform Interpark Commerce filed for a debt restructuring programme with the Seoul Bankruptcy Court last week, following in the footsteps of its two sister companies amid a liquidity crisis at the parent group.
Its request for court-mediated debt restructuring came 18 days after TMON and WeMakePrice filed for the same programme to negotiate with creditors for rescheduling overdue payments.
Interpark Commerce has been experiencing a severe liquidity crunch as customers fled the platform in panic after the other two defaulted on vendor payments last month.
However, the government appears to maintain a generally optimistic view toward the economy, with the Economy and Finance Ministry saying last week in its latest monthly assessment report that domestic demand has been showing a modest recovery, thanks to growth in capital investment by export industries.
In fact, exports have been on a fast recovery from a long slump, growing for the past three consecutive quarters on a year-on-year basis and posting a 9.9% rise in the second quarter of this year. It was the strongest growth since a 13% gain in the second quarter of 2022.
There is no denying that exports are the most important factor for the economy, as South Korea’s growth relies heavily on overseas sales while the domestic market is small.
But the current export growth is led by a few major products and partly represents little more than a technical rebound thanks to a surge in chip prices.
During the second quarter, the country’s gross domestic product increased by 2.3% in real terms from the same period of 2023, slowing from a 3.3% gain in the prior quarter despite an accelerated increase in exports, as domestic demand remained in a slump, according to central bank data.
Policy authorities such as the Finance Ministry seem to hope that robust exports will eventually help revive domestic demand through a so-called “trickle-down” effect.
Under this long-held theory, export companies are supposed to bring in revenue from their overseas sales and spend the money at home by either hiring more workers or investing in new facilities.
However, an increasing number of research reports reveal that the trickle-down effect is no longer taking place, or at least has weakened, because more companies operate production facilities outside the country, either for easier access to customers or to comply with host countries’ investment requirements.
Even if such an effect still works in some sectors, it may take longer than before for export revenue to reach consumers within the country. In those cases, it is the responsibility of authorities to ensure that domestic demand does not cool too much and too quickly.
The government is experiencing poor tax revenue again this year as recovering exports have yet to translate into increased corporate tax payments, and weak domestic consumption has reduced overall tax revenue.
Furthermore, it lacks the power to push ahead with legislation when needed because opposition parties hold an absolute majority in parliament.
As for the central bank, it promised earlier this year to manage monetary policy based more on domestic conditions than before when it needed to consider the policy direction of major global central banks, partly due to fears of massive capital outflow and resulting volatility in the foreign exchange market.
However, the Bank of Korea’s stance and remarks by senior officials suggest that it will not change its policy at least until the US central bank begins cutting interest rates for the world’s largest economy.
Given the complicated environment facing South Korea’s policy authorities, it may not be easy or desirable for them to make a big policy shift all at once. — The Korea Herald/ANN
Yoo Choon-sik is a business and media strategy consultant. The views expressed here are the writer’s own.
