The recession handwringing that has become a big part of life in the US and Europe unfortunately skips over a useful proxy for global growth. South Korea's economy doesn't get the respect it deserves, which is a pity because the news has been good recently: Crucial exports are recovering, the labour market is resilient, and the expansion is still very much alive.
So is inflation. The pace of growth in consumer prices hasn't abated as much as economists predicted. Interest-rate cuts, once penciled in by markets for late this year, haven't materialised and are unlikely to do so before the second half of 2024. The central bank, which embarked on an aggressive series of hikes from 2021, has paused and emphasised a higher-for-longer stance. Sound familiar? That's not Fed Chair Jerome Powell talking, but Bank of Korea Governor Rhee Chang-yong.
In important ways, Korea is a mirror for big themes in the global economy. Shipments abroad account for about 40 percent of gross domestic product. The nation's manufacturers churn out semiconductors, autos and cargo ships. The country is a vital trading and investment partner of the US, Japan and China. While Seoul’s tensions with North Korea get plenty of press, trends in commerce and finance struggle to garner attention. Markets often seem far more interested in the latest goings on at the Fed, the agony of Chinese property developers and the Bank of Japan's progress toward dismantling some of the ultra-easy monetary policy that's prevailed for at least a decade.
South Korea’s encouraging picture contrasts with the pessimism that prevailed early in the year. A recession seemed likely. The BOK tried to get out in front of inflation when the Fed, the European Central Bank and a swag of others were still holding rates near zero and printing money. That didn't cut Rhee any slack.
Once the Fed began to ratchet up borrowing costs, emerging markets didn't have much choice but to try to keep pace. Without doing so, local currencies would come under enormous pressure. Rhee remarked in October last year, only half in jest, that autonomy from the government was one thing, independence from the Fed was quite another. “It felt like we were barely breathing with our necks just above water,” Lee Seung-heon, a former senior deputy governor at the BOK, told Bloomberg News in an interview on Friday.
Strains in the Korean financial system were exacerbated by the default of a property developer linked to a provincial government. In December, I wrote that the Legoland amusement park fiasco at the center of that failure might well provide the building blocks of a BOK pivot. The bank did suspend hikes in the opening months of 2023, but the reductions so confidently forecast haven't happened. Officials seem to be settling in for a long hold, while talking tough. HSBC Holdings Plc on Monday pushed back its projection for the first cut to the third quarter of 2024.
The won reflects this reasonably robust picture. It’s one of only two Asian currencies to have gained against the dollar in the past six months. Since the middle of October, it leads advancers versus the greenback, climbing almost 2 percent. The yen is the worst performer.
While officials were drafting the Federal Open Market Committee’s October statement, with its very clear signal that Powell may be done with hikes, good news was emerging out of Korea. GDP gained 0.6 percent in the third quarter from the prior three months, a bit better than economists forecast and matching the expansion from April to June. A few days later, the government reported that exports rose for the first time since late last year. That same week, Samsung Electronics Co delivered better-than-expected earnings and offered an improving outlook.
Korea is a useful barometer, but should the US slip into recession and the world follows, the country won’t withstand the tide. Debate is raging over whether rising unemployment, often a sign of trouble, packs the same punch in the aftermath of the pandemic. Anna Wong and Bill Dudley of Bloomberg Economics asked this week whether things really might be different this time? The euro zone certainly is struggling.
But it’s about time we looked at some indicators in other corners of the world in addition to US payrolls, retail sales and industrial production for a guide to how the world is faring. South Korea is certainly hanging in there, and probably doing better than that. Fingers crossed it’s not alone.
Daniel Moss is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.
Credit: Bloomberg
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