Bad Factors Surround Korean Economy

Bad news is flowing into the Korean economy, including China’s interest rate hike, a fall in the won-dollar exchange rate (Korean won value rising to the dollar), and a contracting international economy.

In the midst of these unfavorable factors, statistics were announced, showing that the Korean economy is entering fully into a downturn phase and spreading forecasts that next year’s economy will become even more difficult.

According to the “September Industrial Activity Trends” reported by the National Statistical Office on Friday, October 29, the cyclical component of the coincident composite index, which indicates the current economic situation, fell 0.2 points from the previous month, and the 12-month smoothed change in the leading composite index, which forecasts the point of time for a change in economic conditions, dropped by 0.1 percentage points, showing a “minus” for the sixth consecutive month.

This can be interpreted that the business expansion phase, which started in the second half of last year, is at an end, and the economy is entering into a downturn phase, meaning a “double dip” (economy falling again after a short recovery) is actualized.

The wholesale and retail sales dropped by 0.7 percentage points from last year’s September, continuing to be at a “minus” for the third consecutive month. Facility investments also fell by 0.7 percentage points, turning into a downfall in five months since April (-1.6 percent).

In this recession, China has raised interest rates on October 28 for the first time in nine years, clearly showing its will to carry out a strong economic retrenchment, forecasting adverse impacts to Korea’s exports with China.

The plunge in won-dollar exchange rate also may give a hard blow to exports.

On Friday, October 29, the won-dollar rate continued to fall for eight consecutive days, closing at 1,119.6 won, down by 5.4 won from the previous day. This is the lowest figure since October 10, 2000 (1,119.0 won).

Another factor clouding next year’s exportation forecasts is that the international economy has been slowing down since the first quarter (January through March) of this year.

The forecast for domestic demand, which can supplement the slowdown in the export increase rate, is not bright. The orders for construction in September fell by 29.2 percent from a year ago, showing a negative growth for the nine consecutive months. The number of construction orders shows the post-six-month situation of the construction business.

Jong sik Kong Chi-Young Shin kong@donga.com higgledy@donga.com