Top Line: Korea’s recovery and continued growth hangs in the balance at the beginning of December

Increasingly the indications of an exceptionally vibrant external sector coupled with ample liquidity in the hands of a section of consumers is in contrast with the sections of the economy that remain depressed.  If we think of the economy as being divided into three parts, exports exceptionally vibrant, but narrowly led by a small group of industries, the middle part rising and falling with the general level of economic activity and the failing sector of households and small businesses the third part.  Living with covid policy clearly revived some social activities and increase consumer expenditure in selected areas, but not to the extent of helping most of the failing economy.    Omicron is likely to pull down growth, already a bit slack in terms of general activity slowing in October, and with only a slight recovery in November when the export sector soared ahead despite chip shortages and supply problems.

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Data for October: shows a decline in industrial output, and generally a slowing economy. In October, the Index of Services went down by 0.3% month-on-month owing to the decrease in ‘Financial and insurance activities’ and ‘Professional, scientific and technical activities’ in spite of the increase in ‘Accommodation and food service activities’   None of this slowdown was evident in exports of course.   Retail sales increased 4.3% YoY although MOTIE claimed a much higher figure in its survey.

Preliminary data for November: tells a story with a very slight improvement in industrial manufacturing (measured by PMI) but an all-time record jump in exports to over US$60 billion, despite a sharp decline in auto exports.   Exports to China rose 27.3% and to SE Asia by 32.7%.  Exports to the US rose 22% and 18.9% to Europe.

Prospects for December: Omicron is likely to make most indicators slower than for November.  Higher covid related deaths and overburdened hospitals will increase a sense of slowdown even though the SME expectations index released just before the omicron scare was positive.   The chip situation will continue to affect the auto industry which had year on year decreases in the 18% range.

From a GDP point of view: this looks like a miss on the 4% growth for Q4 and therefore for the year with Omicron indicators that it is going to slow everything, even without additional social distancing measures.

A review of GDP data newly released on Dec 2 by BOK shows strong private consumption for both Q2 and Q3 well up on 2019 in total, and this is hoped to sustain the growth in Q4 with living with covid policy

Covid: The government switched to a “living with covid policy” at the beginning of November with reductions in social distancing.  This was done without having tamed the 4^th wave and daily infections have increased reaching an all time record of over 5,000 on Dec 1 before the Omicron variant had shown more than 5 cases nationally.  Daily infection rates do not reflect severity, but severe case numbers and deaths do.  Currently deaths rarely in double digits are in the 30s per day.  Worse the government has been unable to increase ICU beds adequately and announced a new “covid at home” policy portending a massive increase in deaths and infections which may cost the DP its election on March 9.

Inflation: in November was 3.7% YoY a record high suggesting that BOK will raise rates for the third time early next year.  If this continues into December then companies will face having high wage demands from employees and unions in 2022 than currently budgeted.

The Election: While polls put PPP candidate Yoon ahead of DP candidate Lee, the early lead of Yoon seems to have disappeared though Yoon so far consistently polls above Lee. Yoon and party Chairman have fallen out over appointments to the campaign while Governor Lee has removed supporters of his rival Lee Nak-yeon.   Policies of the candidates are emerging especially on housing and UBI, but surprisingly on some issues, notably North Korea policy the difference is slim.

US will not give up war time military control: Despite it being one of Moon’s ambitions to have OPCON passed to Korea, all the indications are a refusal by the US to say that Korea is qualified.  President  Moon is reported to have some success in his peace declaration initiative with China, but the US seems to be digging its heels in.

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