Cyclical rebound to lift South Korea in second half?

SEOUL - A cyclical rebound is here, and South Korea is going to be a beneficiary of hard work done during Q2 2020 to flatten the COVID-19 curve without resorting to lockdown, while also implementing aggressive easing to avoid a liquidity squeeze and limit the economic fallout of the pandemic, according to the global financial group, Natixis.

It says South Korea will benefit from the fruit of previous actions - and a recovery in global demand as the world cautiously normalises.

"A high dependency on exports - 35% of GDP in 2018 from 30% in 2009 - means that the Peninsula was disproportionately impacted by the decline in demand for its industrial goods," Natixis says.

"While semiconductors held up due to the global tech cycle and the world being more virtual, other exports languished after an already-terrible 2019 of double-digit decline.

"But what was an Achilles heel will turn into an asset in H2 2020 as mobility normalises globally and Korea's large exposure to trade turns into a positive.

"Already, data from key export destinations, such as China and the US, has turned positive in the first 10-days of exports in July. Moreover, mobility and PMI data shows a recovery globally, which means more demand for Korean goods beyond semiconductors.

"On top of this, the successful taming of the virus means that South Korea is also benefitting from its own domestic demand, which is further supported by fiscal and monetary stimulus.

"Cyclically, South Korea will likely narrowly avoid a recession in 2020, but its recovery will be modest in 2021. Its medium growth trends will likely hover around 1% as it transitions to a silvering economy that will structurally push the fiscal burden higher." 

Natixis says South Korea's worsening demographic trends and rising competition mean that domestic demand faces "rather strong headwinds".

"And the temptation to use fiscal policy to offset this is too great to resist, given the also weak external outlook that makes it rather difficult to export its deflation.

"Thus, it is beginning its period of fiscal debt ascent and the rise of the public sector -- like Japan in the past -- as the private sector starts to shrink on a declining fertility rate, which means worsening domestic demand.

"For now, a cyclical rebound is here in H2 2020, and that is something to cheer about especially, after an horrific H1 2020. That should give space for policy-makers to relax after a hectic Q2 2020."

www.natixis.com (ATI).