Korea’s economic and geopolitical risks pose strategic quandary

Korea’s economic and geopolitical risks pose strategic quandary

• The South Korean economy is being buffeted by a combination of cyclical headwinds, structural defects, and a deteriorating strategic position. Tough choices await its leaders.
• The sluggish semiconductors market will weigh against manufacturing activity and exports. China’s reopening in trade and tourism is unlikely to compensate.
• The severe population headwinds are caused by entrenched and interlinked factors including labour market rigidities, costs of household formation, and cultural legacies.
• Geopolitical tensions also pose questions for South Korea’s export-driven model of industrialization. Other Asian markets wishing to emulate this path should be cautious.

Will north korea spring a nasty surprise?

• The chances of destabilizing actions emanating from Pyongyang have increased due to changes in domestic and external dynamics in the regime’s decision making.
• Pyongyang’s history of calibrated but high-risk provocations points to the regime trying to pressure the US to recognize the regime and nuclear power, bypassing Seoul.
• A series of weapons tests and demonstrations, a severance of communications, and domestic troubles mean that the risk of foreign adventurism has risen.

China’s economy remains fragile despite headline recovery

• The central bank’s depositors’ survey shows signs of recovery in sentiment, but household behaviour still leans towards rebuilding financial buffers and precautionary savings.
• Exporters are also facing difficulties, spurring policy support. A nascent recovery in the property sector, although this needs to be spread geographically for a significant upside.
• These pockets of fragility mean that spillovers from China’s re-opening may be less than hoped, although outbound tourism remains a bright spot given pent-up demand.

China’s economy remains fragile despite headline recovery

• The Reserve Bank of India pauses rate hikes unexpectedly despite still-high inflation. This strikes us as premature due to a lack of decisive disinflationary progress.
• Indonesia’s inflation sees softening amidst easing food and housing cost pressures.

Read more: CAA-Weekly-11-Apr-2023.pdf