Posted by: Ihlwan Moon on February 4, 2009
Economic data released by South Korea in recent days underline how a recession in China could bring misery for the rest of Asia. Korea’s exports suffered the worst monthly plunge on record in January, while the International Monetary Fund warned this week that the Korean economy would contract 4% in 2009, against a growth of 2.5% last year. The biggest reason: demand collapses in the world, particularly in China, which accounts for 22% of Korea’s overall exports (this portion jumps to some 27% when shipments to Hong Kong are added).
To get the feel, just look at what happened in the last three months of 2008. During that quarter, China’s GDP grew 6.8%, a sharp fall from 11.2% a year earlier. The impact was dramatic in Korea where GDP contracted 3.4% in the three months from a year earlier, against a gain of 3.8% in the third quarter. Korea’s exports to China sank 32.2% in January, 35.4% in December and 33.3% in November.
Most economists in Seoul don’t agree with the IMF on the extent of GDP contraction for Korea. While Korea is certainly vulnerable to outside shocks, given that its exports represent well over 40% of its GDP, it is hard to understand why the IMF adjusted down its projection in such a drastic manner in a span of little more than two months. As late as November, the IMF forecast the Korean economy would grow 2% in 2009. (The Seoul government still projects a 2009 growth of 2%, while many economists predict a contraction of around 2%).
Yet no one is questioning China will have enormous influence over the Korean economy. Li Wanyong, economist at Hyundai Research Institute, a private think-tank, figures if China’s GDP growth slows down to 7% this year, that will probably lower Korea’s exports to China by 13% or by $12.1 billion. The export fall will also cause a production cut of $34.9 billion and a reduction of 135,000 jobs, Li adds.