Impact of the Global Investment Slowdown on the Korean Economy
As world trade slows on the back of a weakening global economy in the post-financial crisis era, concerns are growing over the ramifications on the highly-trade dependent Korean economy.
Already, Korea’s exports have fallen behind global trade,
becoming a key factor in the nation’s economic decline.
There are many causes for the low growth trend in global trade.
A prime example is the downturn in global investment that has been witnessed since the mid-2000s.
Accordingly, this study examines the contraction in global trade resulting from this phenomenon,
and analyzes Korea’s dependence on global final demand
to estimate how the slowdown in global investment will impact the Korean economy.
Despite showing an impressive rise before the global financial crisis, the proportion of investment to global GDP has remained on a downward trajectory since.
Meanwhile, private consumption has increased,
as has government spending, owing to aggressive economic stimulus measures led by advanced countries.
However, investment induces more import than consumption.
According to an analysis of 18 OECD countries, a 1 unit rise in private and government consumption and investment will increase imports by 0.25, 0.1 and 0.32 won, respectively.
Meaning, if investment falls behind consumption, global trade will also decline.
Compared to other countries, the share of intermediate and capital goods, which are closely linked to investment, is significantly higher in Korea’s export portfolio.
As a result, Korea’s dependence on global investment demand is greater.
Analysis of Korea’s dependence on global investment, reveals that,
47.9% of Korea’s total exports is induced by global investments, ranking number one in the world.
Moreover, at 15.5%, the impact level of global investment on Korea’s GDP is 2.4 times that of the world average.
This implies that, the slowdown in global investment will have a sizable impact on Korea.
Then, how extensive will the fallout be?
Korea’s higher dependence on global investment than on global consumption,
leaves the economy vulnerable to fluctuations in the global final demand composition. For example, a 1%p increase in the share of private consumption and 1%p decrease in the share of investment will cause Korea’s GDP to decline by 0.76%p.
By industry, the growth of Korea’s flagship industries including electrical and electronic devices, machinery, metals and transport equipment would fall by more than 3%p.
Additional simulated calculations estimate that the post-crisis decline in the investment has already caused Korea’s growth rate to drop by 0.21%p per annum.
In comparison, Germany and Japan, who have similar industry structures, will see their growth rates drop by 0.14%p and 0.08%p, respectively.
While there are numerous short-term and structural factors that have contributed to the slowdown in global investment,
fundamental policy changes are needed to enable industries to respond efficiently and effectively.
Production resources must flow smoothly from declining industries to promising industries to promote healthy growth,
and efforts must be made to restructure distressed companies and enhance flexibility in the labor market.
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