South Korea’s export slump worsens as chip demand wanes

South Korea’s slump in exports worsened in July as semiconductor demand further deteriorated, undermining hopes for a bottoming-out in trade.

Overall shipments decreased 16.5% from a year earlier, according to data released Tuesday by the trade ministry. That compares with economists’ forecasts for a 15% decline. Exports of semiconductors slumped 34% in particular, worse than the 28% decline in the previous month.

South Korea’s exports to China fell 25.1% while those to the US slid 8.1%. Overall imports retreated by 25.4%, resulting in a trade surplus of $1.6 billion.

“Semiconductors are key to the exports and we’re unlikely to see a recovery until demand returns and the price rebounds,” said Cho Chuel, an analyst at the Korea Institute for Industrial Economics & Trade. China is relying less on imports and producing more at home, which has weighed on South Korea’s exports, he said.

South Korea ships a wide range of goods and this makes its data a key barometer for trends in international trade. Global activity has been restrained by high inflation, rising interest rates and weaker demand in China.

Trade has far-reaching implications for South Korea’s economic growth. The economy expanded 0.6% last quarter from the previous three months largely because exports fell less than imports.

Worldwide demand is likely to stay weak given the ongoing fight by central banks against inflation. While it has stood pat on policy in recent months, the Bank of Korea is keeping the door open to further tightening after raising its benchmark rate by a cumulative 300 basis points since 2021.

Positioning in swaps markets indicates that traders believe the US Federal Reserve and European Central Bank are nearing the end of their tightening cycles, but it may be some time before interest rates start to come down again.

Still, there are pockets of optimism. Chipmakers have started to forecast a recovery in overseas shipments as demand picks up after a prolonged lull. In particular, help may come from China, where authorities are aiming to implement steps to revive growth after an expected recovery from Covid lockdowns sputtered this year.