South Korea’s economic challenges and the imminent election


Prevailing issues: A sale signage at a market in Jeonju, Jeollabuk Province. South Korea’s domestic demand remains weak and the construction sector’s troubles are far from over. — Bloomberg

SOUTH Korea entered into full-scale election mode late last week, with political parties launching their official campaigns to stretch until the April 10 poll to elect all 300 members of parliament.

The election is held as the country struggles to overcome daunting challenges from virtually all fronts at home and abroad.

Even before the official campaign period started, major parties and their candidates had already been engaged in various events across the country to meet and directly appeal to voters. Leaders of each party are also busy accompanying candidates and making various promises designed for regional development.

Including their sister parties set up for the seats to be allocated under the system of proportional representation, the ruling People Power Party currently lacks a majority and is far outnumbered by the main opposition Democratic Party of Korea.

The latest opinion polls fail to provide any clear indication about the election results.

Discussing the political aspects or the likely results of the election goes beyond the purpose of this column, but the lack of attention to economic issues throughout the campaign process is more than disappointing as the country’s economy has yet to take off for full recovery from a slump while preparing for increasing threats abroad.

Rising exports of semiconductors, which account for a large proportion of the country’s overseas shipments, from an extremely poor showing last year managed to lift manufacturing production since the beginning of this year.

However, domestic demand remains weak and the construction sector’s troubles are far from over.

The seasonally adjusted index for retail sales fell a combined 2.1% for the first two months of this year to hit 101.4 in February, the lowest since late 2020, according to preliminary data released last week by Statistics Korea.

This contrasted with a 1.8% gain in the manufacturing sector’s output for the two-month period.

The central bank’s monthly survey of consumers about their future spending plans and economic confidence also painted a grim picture, suggesting that private consumption will remain depressed due to an extended period of high interest rates amid high inflation, according to March data released last week by the Bank of Korea.

Structural problems

Other than these macroeconomic indicators, there are also several structural problems that the government needs strong support from the National Assembly to manage carefully and prevent from deteriorating. These include issues regarding real estate project-financing loans and the still high household debt.

Economic growth for this year itself may not be a big issue when it comes to general elections because it is cyclical by nature, but what is more worrying is the lack of attention to the growing threats from abroad, such as the deepening US-China standoff and the heated global competition in the high-tech sectors.

Since its admission to the World Trade Organisation two decades ago, China has quickly emerged as the factory of the world and has been regarded mainly as a place to assemble goods using cheap labour. Naturally, the key risks there included the rising cost of manufacturing and China’s increasing localisation of simple products.

However, things are changing quickly and it turns out China’s achievement in some of the key industries has reached a threatening level, including in such sectors as artificial intelligence, semiconductors, electric vehicles, and rechargeable batteries.

Backed by the huge demand at home, China has quickly emerged as a global power in these areas, where South Korea has hoped to enjoy a big lead against China for a long time.

China’s achievement

There are increasing warnings that China’s achievement in some high-tech sectors has already reached a real threat to the global players. Seoul-based Hi Investment & Securities warned in a recent report that the “Made in China 2025” campaign has produced results that pose a threat even to the United States and the European Union.

Days after the year 2024 started, the world was shocked by news that China’s BYD sold more fully electric vehicles globally than Tesla during the final quarter of 2023, marking the first time the Shenzhen-based firm outpaced the US company, which has long been synonymous with electric vehicles.

In the smartphone industry, Chinese makers had once been largely ignored by traditional leaders such as Apple and Samsung Electronics, but the situation has changed quickly.

Counterpoint Research reported recently that sales of Apple’s iPhone plunged 24% in China in the first six weeks of 2024 due to competition from local makers such as Huawei.

The challenge from Chinese companies is not limited to the manufacturing sector, as Chinese eCommerce firms are quickly expanding their business in South Korea.

All these developments show challenges facing South Korea are growing at a much faster pace than most people have imagined.

Furthermore, the outcome of the US presidential election later this year will bring about even more obstacles for South Korea, in which the administration of President Yoon Suk Yeol will be passing the midpoint of his five-year term after having largely failed to implement much of his reform pledges made at the time of inauguration in mid-2022.

In the United States, President Joe Biden and his predecessor Donald Trump face a Nov 5 general election rematch, in a race that opinion polls suggest will be extremely close. Whoever emerges as the winner, the new administration’s trade and foreign policy will most likely accelerate the recent trend of making the US interest the top priority.

It is annoying that even at this moment, all the political parties in South Korea are focusing almost wholly on attacking each other on mostly secondary issues and calling on voters to punish each other, as if they are competing with the Chinese companies to be the real threat to their own country. — The Korea Herald/ANN

Yoo Choon-sik worked as the chief South Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own.

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