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South Korea Economic Growth Forecast and US-China Trade Tensions

The South Korean government`s “income-led growth” strategy has largely
insulated its economy from a turbulent political and security environment.
But as US-China trade tensions increase, questions arise….

This week’s Q2 report is expected to confirm GDP growth remains solid,
adding 0.7% over Q1 (+2.9% YoY) and confirming the small contraction in Q4
2017 as a reflexive and temporary response to the prospect of ‘fire and
fury’. A Bloomberg News survey shows mean estimates are for a gentle glide
path lower to +2.7% for 2019; South Korea remains a study in economic
stability in the face of North Korean tensions, geo-economic targeting by
China over the installation of a THAAD missile deterrent, and even a
Presidential impeachment. How is this possible?

As we drill down into the GDP figures, we see that private consumption,
government consumption, final domestic demand and capital formation all
suggest that the economy is seeing somewhat uneven support, but the
government is addressing this issue with long-term strategies. The
government has set in place an aggressive growth plan, driven by increased
public employment and augmented by an aggressive rise in the minimum wage
and increased social spending. These measures are actually designed to help
South Korea cope with an aging population – like most countries in the
region, including Japan, South Koreans are ageing fast and are actually
leading the OECD countries in this statistic. Supporting domestic demand and
consumer price inflation by creating robust labor market conditions, it
turns out, can also be useful in case of a swarm of confidence-sapping
external shocks. Note that business and residential investment translated
into output growth of 3.1% in 2017 even as the Manufacturing PMI
surveys barely registered expansion in their strongest months.

Can the same approach shield the economy in the face of gathering trade
tensions? Recent surveys are pointing to negative impact of an all-out trade
war hitting other economies in the region – including South Korea. Tariffs
are felt with a lag since they are implemented on new shipments – South
Korea actually saw a healthy uptick in export growth between February and
May as manufacturers stocked inventory, followed by a 4.8% contraction in
June. Q2 GDP may therefore be somewhat mis-leading and Q3 export activity an
important bell-weather; we at Classiarius feel that the China trade tensions
will intensify, presenting challenges for the latter half of 2018. However,
we expect that US pressure will eventually force the Chinese government to
make more concessions, preventing a spread of negative economic fallout to
South Korea and the region.

Team Classiarius

JMB

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Classarius is the only data driven news for blockchain, cryptocurrencies and technology from investment professionals.
Disclaimer: We do not provide investment advice or strategies, this article is not intended as such but only to provide you the reader with information. Please conduct your own research before any investment of any kind.

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