South Korea Signals Trouble Throughout Asia’s Economy

Economic news from South Korea sounds an ominous note. Declining exports to the United States, Europe, and China make for the strong likelihood that this important Asian economy has entered recession for the first time since the Covid pandemic. In February, the most recent period for which complete data are available, all South Korean exports stood some 15% below year ago levels. Sales to China were some 30% below year ago levels, an indicator that Chinese industry is not operating at full capacity. Exports of semiconductors stand almost 50% below year-ago levels, an indicator that global economic activity has slowed. The nation’s index of factory activity stood at 48.5 in February, well below the level of 50 that demarcates between growth and contraction.

South Korea’s finance minister, Choo Kyung-ho, blamed the shortfall on the length of the Lunar New Year holiday in China and sharp declines in export prices, especially for computer chips. But the shortfall clearly goes deeper. Price declines in this once highly sought-after product reflect a global drop in demand. In recognition of this reality, South Korean government sources are already forecasting a 4.5% drop in all that country’s exports this year, quite a change from the 6.1% growth of 2022. Those same government sources also concede that the South Korean economy contracted during the fourth quarter last year and is on target to do the same during this year’s first quarter, effectively the country’s economy is in recession.

This is a bad sign for all of Asia’s export-oriented economies, including, perhaps especially, China’s. Taiwan and Malaysia, both big producers of semiconductors, have also seen overall declines in their exports. Japan reports that its index of factory activity at 48.6 in February, the most recent period of which complete data are available, up slightly from January but still in contractionary territory. Indeed, Japan has not seen a positive reading on this statistic in over a year. Toru Nishihama, chief economist for Dai-ichi Life Research Institute in Tokyo finds the cause in “weakness in major export destinations like the United States and Europe.”

China has not entirely escaped this trend. Some hope of strength emerged when last January Beijing at last abandoned its zero-Covid lockdowns and quarantines and opened the nation’s economy. And there has been a surge in consumer spending, what the media refers to as “revenge spending.” Because of this surge, China’s official index of factory activity did lift over the 50 demarcation between growth and decline. It registered 52.6 in February, the most recent period for which complete data are available. But there is reason to doubt the implied strength. For one, the consumer spending has occurred almost entirely among luxury goods and services, suggesting that it might not have the staying power required to propel the overall economy. For another, the official factory activity index has a narrow base, focusing almost exclusively on large, state-owned firms. The broader, independent Caixin index shows much less impressive gains and as of February stood at 51.6. More ominously, China’s exports in January and February remain almost 7% below year-ago levels.

With the central banks of Europe and the United States lifting interest rates and constraining credit flows, export prospects for South Korea, China, and Asia generally look limited at best, even if the west avoids outright recession. Unless “revenge spending” redoubles in China – hardly likely – Beijing will almost surely have to revise down the already reduced 5.0 percent forecast for real growth in 2023.