A recession in 2020 despite massive stimulus measures.
A recession on the horizon
South Korea is the world's leading producer of displays and memory semiconductors and the second largest shipbuilder. Exports account for about 50% of GDP (mainly semiconductors and other electronic goods, cars and chemical products).
In 2019 GDP growth decreased to 2%, mainly due to the global slowdown in trade, the Sino-US and Japan-South Korea trade disputes, less exports to China, and lower demand and decreased prices for semiconductors (the value of semiconductor exports decreased 25% year-on-year in 2019). While private consumption was modest, higher government spending sustained the economic expansion.
In H1 of 2020 the economy is facing a technical recession due to the impact of the coronavirus epidemic, which has disrupted regional supply chains and hit global economic growth. Delayed shipments of parts from China have hurt the Korean automotive and ICT sectors, with businesses operating below capacity. Ongoing deterioration of global demand and supply chain disruption have a major negative effect on investment and exports, expected to contract in 2020.
At the same time, the large amount of coronavirus cases in the country itself has negatively affected domestic consumption, which is forecast to barely growth or even to contract in 2020, while unemployment is expected to increase. In 2020, South Korea´s GDP is expected to contract by about 1%. The depth of recession depends on the duration and extent of the coronavirus pandemic.
After announcing some extra spending in February 2020 in order to offer loans to struggling airlines, shipping companies, travel agencies and retailers, in March 2020 the government earmarked an extra budget worth USD 9.8 billion to support businesses and consumers and to spend in health care. Early April the administration announced an additional stimulus package worth USD 44 billion.
While those fiscal and monetary measures can dampen somehow the economic impact of the coronavirus pandemic, a massive global economic and financial markets deterioration would certainly trigger a protracted recession in South Korea. Structurally, the economy remains vulnerable to sharp downturns in China and an escalation of the Sino-US trade dispute. Domestically high household debt (about 95% of GDP) remain an issue. While it can be sustained at low interest rates, higher debt servicing costs could dampen consumer spending.
Sharply rising business insolvencies
The slump in domestic demand has a severe impact on the credit risk situation and business performance of consumer durables, retail, services, and transport sectors. At the same time, construction businesses and related industries like steel suffer from the continued subdued performance of the residential construction segment (due to measures to rein in housing prices). A further deterioration of external demand could weigh on company profits of businesses in export-dependent sectors. Currently business insolvencies are expected to increase sharply in 2020.
Decreased tensions on the Korean Peninsula - for the time being
Geopolitical tensions on the Korean Peninsula have decreased somewhat since 2018, but talks between the US and North Korea about its nuclear programme remain stalled, and the conflict over North Korea´s nuclear and missile program could flare up again. This, or even an armed escalation on the Korean Peninsula would have adverse effects on business and household confidence in South Korea and on foreign investors.