Investors in the week ahead will receive an update on the pace of South Korea’s economic growth, as the country suffers a slowdown amid a recent ramp-up of regional trade tensions.

While the ongoing trade feuds between the U.S. and China have generally rattled the global economy, South Korea’s geopolitical conflicts with Japan have highlighted further fragility in the technology sector.

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A recent ruling by South Korea’s Supreme Court, which demanded compensation from certain Japanese companies to some South Korean citizens for decades-old issues concerning forced labor during Japan’s occupation in the early to mid-20th century, had spurred Japan to heighten restrictions on a long list of tech exports to South Korea and cut its status as a trusted trade partner.

Republic of Korea Foreign Ministry spokesperson Kim In-chul said in September that although his country has “endeavored to find a formula that would fulfill the Supreme Court judgment” while keeping its 1965 treaty with Japan intact, “Japan has stonewalled dialogue and instead retaliated on the trade front, while propagating its unilateral claim that Korea is violating international law.”

Kim In-chul added that at “the heart of the problem is Japan’s historical revisionism and unwillingness to fully come to terms with the past.”

Meanwhile, Kim Jung-han, director-general for Asian and Pacific Affairs of the Ministry of Foreign Affairs, reportedly met with Shigeki Takizaki, his Japanese counterpart, in Seoul Wednesday “to discuss issues of mutual interest.”

China’s Shadow Eclipses Japanese Frictions

Although the intensified tensions between the two nations has added to already worrisome growth prospects in the region, the trade dispute may not pose as material an impact on South Korea’s corporate credits or gross domestic product (GDP), as may be expected.

Moody’s Investors Service analyst Wan Hee Yoo, for example, has noted that the conflict with Japan is “unlikely to have a significant impact on rated companies’ earnings,” as Japan’s export controls are expected to “result only in administrative delays in supplies.”

At the same time, Moody’s said that the ongoing U.S.-China trade dispute will continue to negatively affect many export-oriented companies, notably in the technology and chemical sectors, “where firms typically export large amounts of commodities and components to China.”

Wan Hee Yoo added that industry fundamentals in South Korea “deteriorated during the first six months of this year, in particular among the cyclical sectors where rated Korean companies operate,” with the impact “most severe in the memory chip, refining and petrochemical sectors amid sluggish demand driven in part by weakened business sentiment.”

Export Issues

Overall, trade conditions seem to have stymied South Korea’s export capabilities – at least in the semiconductor space, where the country may be touted as a central player.

The Bank of Korea (BoK) highlighted Wednesday that domestic economic growth has continued to slow, underscored by exports, which have “sustained their sluggish trend.” The central bank observed that “export prices of semiconductors, petroleum products, and chemicals have continued to fall amid the weakening of global trade.”

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In response, the BoK Wednesday said it elected to cut its base rate by 25 basis points to 1.25%, amid expectations that its economy may fall back below its July outlook, “owing chiefly to the continued U.S.-China trade dispute and the heightened geopolitical risks.”

The BoK in July had lowered its base rate to 1.50% from 1.75%, on the back of a continued slow pace of global economic growth, also mainly due to the U.S.-China trade dispute, with expectations GDP would grow at the lower-2% level in 2019, below its April outlook of 2.5%.

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In the second quarter of 2019, the nation’s real GDP grew by 1.1% over Q1, driven in part by a 2.3% expansion in exports, including goods such as motor vehicles and semiconductors. The results follow a 0.3% quarter-on-quarter slowdown in Q1 2019, marred by a 2.6% contraction in exports, led by decreases in electrical and electronic equipment, such as LCDs.

Investors will likely be watching the release of South Korea’s advanced estimate of Q3 2019 GDP growth Wednesday for further updates on the economic health of the country, as well as a gauge Thursday on consumer sentiment for October.

Wednesday, October 23

• GDP (Q3)

Thursday, October 24

• Consumer Confidence (Oct)

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