South Korea’s export decline persists as global economy weakens

South Korea’s export slump persisted in January, highlighting a rapidly cooling global economy as rising interest rates weaken demand.

Exports dropped 16.6% from a year earlier, compared with economists’ forecasts for an 11.1% decline, the trade ministry said Wednesday. Imports fell 2.6%, resulting in a trade deficit of $12.7 billion. 

Sluggish overseas shipments were at the core of the Korean economy’s contraction last quarter and may persist for months to come as global consumption slows.

Confidence among Korean exporters is low and industrial production remains weak as manufacturers maintain a cautious outlook about consumer demand.

The world economy is slowing as a result of rising rates to tackle high inflation, as well as Russia’s ongoing war in Ukraine that has fueled oil and food prices. China also continues to struggle to rebound following the easing of its Covid restrictions.

Korean exports are a major barometer of global trade as the nation produces key items such as chips, displays and refined oil that straddle supply chains. It is also home to some of the world’s largest semiconductor and smartphone makers, and a major downturn is hurting those industries and weighing on Korea’s economic momentum.

Global demand is likely to remain subdued this year while household debt, fiscal tightening and high borrowing costs constrain Korea’s domestic recovery, Fitch Solutions said in a note. The economy, as a result, will probably grow 1.5% this year, less than the 1.7% forecast by the Bank of Korea, it said.

Resilient exports were a key reason why the BOK was confident the economy could withstand policy tightening over the past 18 months. With the benchmark rate now at 3.5% — the highest since 2008 — Governor Rhee Chang-yong increasingly sees economic concerns coming to the fore, while the bank keeps policy tight to prevent inflationary pressure from rebuilding.

A turnaround for Korean exports may come from China if the world’s second-largest economy succeeds in reviving its growth engine after an extended period of Covid restrictions. China is the largest buyer of Korean goods that mostly get reassembled to be shipped elsewhere.

“Korea’s exports to China may not rebound strongly in 2023 despite potential reopening of the mainland China in early 2023,” Citigroup Inc. economists Kim Jin-Wook and Choi Jiuk said in a note last week, forecasting a mild recession this winter.