South Korea — Exports lead economic recovery, domestic demand lags

South Korea, Australia’s third largest export market, is benefitting from a recovery in global demand for its key electronics and automotive exports.  On a quarter-on-quarter basis the economy returned to growth in Q3, after two consecutive quarters of contraction. Still, real GDP fell 1.3% in Q3 compared to last year, as domestic demand remained weak. Household consumption declined 4.5% year-over-year, amid a resurgence in COVID-19 infections and tighter lockdowns. Private investment also declined.

Lagging domestic demand has contributed to lower import demand. Australian goods exports to South Korea fell 13% year-over-year in September, posting the fifth straight annual decline. Real-time mobility indicators show recovery in retail and recreation activity after the downturn in August (Chart). Following a 1.9% contraction in 2020, the IMF forecasts South Korea’s economy to grow 2.9% in 2021, returning to its pre-pandemic level of output sooner than many other economies. In the near term, the economy’s high competitiveness and diversified export base supports its ability to absorb and adapt to shocks.

Longer term, the South Korean authorities’ proactive planning to identify new growth engines opens possibilities to boost future economic potential. For instance, the so-called “Korean New Deal” aims to increase investment in green and digital sectors (including solar panels and wind turbines, electric vehicles, cloud computing and artificial intelligence) as well as strengthen the employment safety net. That is positive for Australian exporters, particularly of iron ore, copper, food and beverage. It also opens opportunities for aerospace, automotive, shipbuilding, electronics and machinery exporters to supply South Korea’s strong manufacturing base.