Snowballing trade deficits reach alarming level
South Korea is bracing for diverse economic challenges ahead such as a low growth projection, a volatile financial market, rising trade deficit and plenty of other obstacles. Among them, the increasing trade shortfall has been the most outstanding setback for the Korean economy, which is all the more fragile, given its heavy reliance on external trade.
For starters, the nation's exports declined 14 percent in November from a year earlier, registering a negative growth rate for two consecutive months. This marked the first decrease since August, 2020, and the sharpest drop since May, 2020. The Ministry of Industry, Trade and Energy ascribed the recent decrease to the lingering global economic recession amid the protracted Russia-Ukraine war, coupled with retrenched finances in major countries. It also cited delayed supplies and possible production disruptions caused by a prolonged strike by unionized cargo truck drivers in Korea.
Against this backdrop, the trade shortfall has continued to haunt the nation since April this year. The accumulative trade deficit soared to $42.5 billion during the first 11 months of this year. This figure surpasses the $20.6 billion posted in 1996 and $13.2 billion during the global financial crisis in 2008. This means that the trade shortfall has already reached an alarming level.
What is worrisome is that future prospects remain bleak. The nation's major export markets ― the United States, China and Europe ― have entered a sluggish period. Given the national economy's high dependence on external trade, the prospect of a global economic slowdown will have a far-reaching and adverse impact on the economy.
The Korea Chamber of Commerce and Industry (KCCI) said Thursday, "The national economy has ushered in a recession in November and the downturn will likely persist for the upcoming 18 months." This means the nation will suffer a slowdown until the second quarter of 2024. Worse still, the impact of the high-interest rate which began as of July this year and other belt-tightening policies will directly affect the economy from the first quarter of next year.
It is somewhat encouraging that the Korean won began to show signs of stabilizing, trading below the 1,300 won level against the U.S. dollar, prompted by Federal Reserve Chairman Jerome Powell hinting at a slowing pace of interest rate hikes. "The time for moderating the pace of rate increases may come as soon as the December meeting," Powell told participants at the Brookings Institution in Washington. The benchmark KOSPI reached 2,434 on Friday after breaking the 2,500 level for the first time since August in the middle of trading on Thursday.
Despite the seemingly temporary rally, however, it is premature to expect a rapid recovery as Powell cited the need to raise the rates for a while. "Cutting rates is not something we want to do soon," he said. "That's why we're slowing down, and going to try to find our way to what that right level is." The steady rise in the interest rate has also led to a hike in rates here, resulting in a plunge in home prices which, unless curbed, will become a ticking time bomb for the national economy.
The Yoon Suk-yeol administration has gone all-out to cope effectively with plunging exports and to narrow the trade deficit by convening various meetings presided over by the president. It is time for the entire nation to make a combined effort to prevent a possible economic debacle. Well-conceived steps should be taken to avoid the possible outflow of foreign capital due to the continued trade shortfalls and attract foreign investments in a more proactive manner.
More efforts should also be made to set up a currency swap with major nations such as the United States, in particular, and prevent enterprises and individuals from suffering further financial crunches caused by the high-interest rates.