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South Korea's exports bounce back, but outlook cools

South Korea's exports bounce back, but outlook cools

South Korea's exports bounced back in July with a 6.2% year-on-year value increase, but analysts have warned that the outlook for the rest of the year is cloudy due to geopolitical tensions and uncertainty about long-term demand for memory chips.

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By Noah L. Wilson 02.08.2018

South Korea’s exports bounced back in July with a 6.2% year-on-year value increase, but analysts have warned that the outlook for the rest of the year is cloudy due to geopolitical tensions and uncertainty about long-term demand for memory chips.

Strong sales of chips were one of the primary factors in the latest export upturn. Exports totaled USD $51.9bn last month, according to new government data published on Wednesday. This was a welcome return to positive territory after exports slipped by 0.2% in June.  However, they fell short of the 7% growth forecast by Reuters economists.

Imports also came in under expectations, though the USD $44bn figure does represent a 16.2% increase compared to 12 months ago. Robust overseas sales are encouraging but suggest that the full impact of the trade war between China and the United States has yet to be felt.

More challenging conditions are in the forecast for the coming months, and economists are concerned that worsening trade tensions may limit exports from South Korea to China, which remains its largest global trading buyer. In particular, China spends a great deal on South Korean intermediate products.

“The US-China trade conflict will put downward pressure, and exports could dwindle," Kiwoom Securities Economist Kim Yu Mi said. A two-year-long chip boom has boosted exports, but there are fears that this may finally be ending. The chips have played a major role in export growth in South Korea during the last year.

Kim’s sentiment appears to have support from the Bank of Korea, which recently revealed that facility investment fell by 6.6% between April and June. The bank said that the drop-off was mainly due to “weaker investment for memory chips and display panels”.

In the short term, demand should remain relatively strong, and August could see a temporary boost from the arrival of new smartphones, according to JP Morgan Economist Park Seok Gil. Samsung is currently preparing to unveil its new Galaxy Note, which will launch sometime this month.

Concerns about the impact of trade conflict on South Korea’s relationship with China makes sense considering that the former’s shipments to the latter surged by 27.3% last month. This means that exports to its biggest trading partner have increased in consecutive months for almost two years. Strong sales of memory chips have driven this.

Exports to other countries also increased in July. Total shipments to the US gained 8.8%, though there was a 2.6% decline in car exports and a 23.4% drop-off in steel exports. South Korea’s trade ministry said that import tariffs on steel had caused the notable downturn. Meanwhile, shipments to Japan rose by 17.6%.

Of South Korea’s 13 top export goods, almost half recorded double-digit growth for the month. Petroleum goods led the way with a 45.2% uptick, while steel and semiconductors saw a 34% and 31.6% increase respectively.

A separate statement released by the government in midweek showed that inflation is still some way short of hitting the central bank’s target of 2% for the year. It remained completely unchanged at 1.5% in July.

In other financial news, growth of China’s manufacturing sector slowed considerably in July on the back of a decline in export orders. A private study revealed that the Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) had dropped to 50.8 last month from June’s 51.0.

“In general, the survey signaled a weakening manufacturing trend as a grim export market dragged on the sector's performance,” CEBM Group Director of Macroeconomic Analysis Zhengsheng Zhong said. “The positive drivers were the increase in stocks of purchases and easing pressure on capital turnover."

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