The outlook on the electronics industry

The Korean economy has been showing signs of rapid recovery since the second quarter of 2009. Asset prices started to go back to normal levels and private consumption has been on the rebound, boosted by economic stimulus packages. In addition, exports have bounced back by volume since June of 2009. Real economic indicators have been improving and leading economic indicators are pointing to a continuous economic recovery in the future.

However, on the grounds that one-off factors - such as the low base effect from the previous year, economic stimulus packages and exchange rate effects- have played a large part in fueling the rapid economic recovery, the Korean economy is highly likely to grow at a slower pace in the future. In the first half of 2009, government-led spending and investments in public works paid off, while increased consumption of durable goods, driven by economic stimulus packages, came into play after midyear 2009.

<The outlook on the production of the electronics industry >

The global economy on the rebound

The global economy has entered a recovery phase, ending the chapter of the global economic recession, brought on by the global financial turmoil, but the recovery pace is expected to be moderate. Judging from economic indicators, it is fair to say that the real economies of leading nations have started to turn around since the second half of 2009.

While advanced economies are likely to grow a mere one percent in 2010, emerging markets are expected to lead the global economic recovery. The recovery of global trade is projected to be somewhat hampered by advanced nations' debt restructuring, the expansion of protectionism.

International oil prices have been rising faster than expected owing to financial factors such as a weak US dollar. As the global economy takes a turn for the better, high oil prices are expected to linger for some time. However, in terms of fundamentals, demand is not as strong as it used to be, so the probability of additional gains in international oil prices stays low.

<The outlook on domestic demand for electronics goods >

The Korean economy grows 4.8 percent thanks to the low base effect

In 2010, S. Korea is expected to see its economy continue to pick up - though, at a slower pace, with projected GDP growth of 4.8 percent in 2010 thanks to the low base effect stemming from the first half of 2009. The low base effect is likely to widen the gap between economic growth in the first half of 2010 and that of the second half.

Except for the low base effect, a real economic recovery or a sensible economic recovery will be much more modest. When the low base effect from the first half of 2009 is excluded, the second half of 2010 is likely to see the Korean economy rise 3.3 percent.

There are fear factors such as the possibility of the global economy's double-dip recession on the heels of exit strategies and the tapering effects of economic stimulus packages; and the probability of increased volatility in international oil prices and exchange rates that would follow possible dips in the value of the dollar. Rising inventory levels of major industries, however, are likely to jack up economic growth for 2010.

In the mid term, on the grounds that the global export market is on shaky ground as there is likely to be a long way to go before the tumbled global trade goes back to pre-recession levels, the economic recovery, this time around, will be milder. Facility investment is expected to post double-digit growth thanks to recoveries in consumption and exports and the low base effect. Automobiles, displays and semiconductors are expected to spearhead growth in facility investments. 

Export gains and trade surpluses

In 2010, the global economic recovery is projected to ramp up exports and imports. Despite a strong won, the US-led global economic recovery will help S. Korea's exports climb around 13 percent. Imports are expected to soar as much as 20 percent, boosted by recovering domestic demand, rising international raw material prices, increased imports of intermediate goods (caused by export booms) and the low base effect from 2009. As imports are likely to outrun exports, S. Korea's trade surplus would hover around US$24 billion, a steep fall from 2009.

Customs-cleared exports, which dropped 13.8 percent year-on-year to US$363.9 billion in 2009 - are expected to rise 12.8 percent to US$410.5 billion in 2010. On the other hand, customs-cleared imports that shrank 16.7 percent to US$323.6 billion in 2009 are projected to zoom up by 19.6 percent to US$ 386.9 billion in 2010. S. Korea's trade balance is expected to dwindle to US$23.6 billion in 2010 from US$40.3 billion in 2009. 

The IT industry drives up domestic demand in manufacturing

The release of Windows 7, the World Cup 2010 in South Africa, the expansion of smartphone markets, and increased demand for LED and solar cells are likely to boost domestic demand in the IT industry more than in any other industry.

Sales of displays, in particular, are projected to surge 41 percent thanks to the low base effect and booming front-line industries. In the non-IT industry, domestic demand for general machinery and steel will gain 10 percent thank to a rebound in construction and facility investments. And demand for textile and textile chemicals will slowly inch up, while that for automobiles and shipbuilding is likely to be in the doldrums. Sales of automobiles are expected to lose 1.4 percent due to weakened purchasing power resulting from mounting household debts and the expiration of "tax deductions for clunkers" program.

Production of the IT industry is projected to pick up thanks to gains in exports and imports. The low base effect and recoveries in exports and domestic demand will help most industries turn around. The IT industry will be the driving force behind the production growth in manufacturing. The production of displays is likely to rise 11.2 percent, while that of semiconductors and information & communications equipment is predicted to increase 6-7 percent. On the other hand, the production of home appliances is forecast to gain a disappointing 2.1 percent as the levying of individual consumption tax on home appliances puts a damper on the sales of big ticket items.

Exports go up 10.8 percent

Although a strong won can put downward pressure, exports are expected to jump 10.8 percent, remaining similar to 2008 levels, as exports to emerging markets, led by China, continue to grow. The IT industry - whose exports are expected to climb 15.2 percent thanks to such improvements in export conditions as the World Cup 2010 in South Africa and the launch of Windows 7 - is likely to lead export activities in manufacturing.

Exports of semiconductors, displays, information & communications equipment, and home appliances are expected to advance 17.0 percent, 15.1 percent, 14.3 percent and 13.4 percent respectively. Of the total exports, the combined share of shipbuilding, information & communications equipment, automobiles, and semiconductors is forecast to amount to 41 percent. Each of the four industries has an around 10 percent share of the total exports.

<Export outlook>

Imports go up 12.4 percent

In 2010, the revenues of the top 10 major industries are projected to gain 12.4 percent due to the low base effect from 2009 when their revenues tumbled 24 percent, but still they are expected to fall short of 2008 levels.

The IT industry's imports will rise 14.8 percent, boosted by increased demand for parts imports for export goods, growing reimportation of products and parts produced overseas, and foreign brands' inroads into the Korean market. The slump in exports and imports in 2009 was largely due to a decrease in unit prices that came on the heels of global recession-triggered volume reductions, a weak won and a drop in raw material prices. As for exports, by volume, they reversed course and ticked up after June of 2009.

A strong won, the global economic recovery, and rising oil prices have started to push up the unit prices of exports and imports. Exports of IT goods such as displays and semiconductors are showing signs of rapid recovery.

The global economic recession has made a dent in S. Korea's exports, but in view of major economies, S. Korea has fared well in relative terms. When post-financial crisis export growth is compared, S. Korea's export loss is milder than other major economies. After the global credit crunch struck, flagship export items have seen their market shares significantly increase in the global market. Since these relative booms are believed to hinge on exchange rate effects, the appreciation of the won is predicted to detract from the booms in the future.

However, in light of the long spell of a weak won and the fact that the won-dollar exchange rate, unlike other major currencies, is still at high levels compared to during the pre-financial crisis periods, the relative booms are estimated to continue for the time being if the won-dollar exchange rate slowly goes downward.

The real economy has been showing a faster-than expected recovery, propped up by the Korean government's aggressive economic stimulus packages and recovering asset prices. One-off factors, such as economic stimulus packages and a weak won, need to be taken into consideration. Private consumption posted year-on-year growth of 0.6 percent in the last third quarter due largely to the government's "tax deductions for clunkers" program. In the post-crisis periods, S. Korea's export gains, relative to other rivaling economies, are estimated to have rested largely on exchange rate effects and major economies' economy-boosting efforts.

When S. Korea is compared to Japan who has a similar trade structure, S. Korea's relative export booms seem to be attributable to price falls and the effect of payability, brought on by the weak won.

Exchange rate effects and decreased demand for high-end Japanese goods during the financial crisis are responsible for 70 percent of S. Korea's relative export booms.

<Import outlook >

Exports of home appliance are expected to advance 13.4 percent

Amid improving consumer confidence, helped by wide-spreading optimism about the Korean economy since the second half of 2009, domestic demand for home appliances is projected to gain 3.8 percent in 2010, breaking the cycle of decline in 2009.

Exports of home appliances are likely to advance 13.4 percent in dollar terms in 2010, bolstered by the World Cup 2010 in South Africa, enhanced branding power of S. Korean white goods suppliers, reinforced competitiveness, expansion of overseas economic cooperation, and the continuation of China's unrivalled economic growth.

In dollar terms, exports are expected to grow, but a strong won is likely to send the won-converted value of exports growth into turning negative. In addition, expected sluggish growth in domestic demand is likely to weigh down the production of home appliances that is forecast to edge up a mere 2.1 percent in 2010. On the other hand, imports of home appliances will surge 14.8 percent, dwarfing export gains, on the back of the low base effect from the previous year and the strong won- which have pushed down the prices of imports, fueling demand for high-end and low-end imported goods, and parts needed to manufacture export goods.

Exports of information & communications equipment are likely to jump 14.3 percent

Domestic demand is forecast to rise 15.1 percent year-on-year, shored up by an increase in the shift from 2G to 3G mobile phones, expanded smartphone markets, high demand for equipment needed to build telecommunications networks, and the release of Windows 7.

Exports of information & communications equipment are predicted to climb 14.3 percent year-on-year thanks to the recovery of the global mobile phone market, the growing global market for 3G and smartphones, rising demand for information devices at the tail of the release of Windows 7, and the low base effect from 2009.

Although the overseas production of cell phones is likely to increase, production of cell phones is likely to gain 7.1 percent year-on-year thanks to the overall recovery in domestic demand and exports. Imports are forecast to ascend 13.8 percent year-on-year, boosted by growing demand for information & communications equipment, increased parts imports for booming mobile phone exports, global information & communications equipment giants' forays into the Korean market- for instance, Apple's iPhone.

Exports of displays are expected to jump 15.1 percent

Domestic demand for displays is projected to zoom up by 41 percent as the release of Windows 7 would drive growth in demand for IT equipment and a drop in LCD TV prices would boost demand.

Exports are also likely to post a 15.1 percent hike as growing demand for displays, helped by the World Cup 2010 in South Africa, is expected to offset other price-lowering factors and the previous year's impressive export gains.

Production is predicted to increase 11.2 percent as the World Cup 2010 in South Africa, booming exports, and the low base effect overshadow oversupplies in the first half. Imports will escalate 10.6 percent as demand for IT equipment shows signs of improvement and domestic shortages of IT goods would lead to more demand for imports.

Exports of semiconductors are predicted to ascend 17 percent

Domestic demand for semiconductors is expected to mount 7.4 percent as exports of  DTV, smartphones, and vehicles boomed, and promotion of the green grow industry led to growing demand for LED and solar cells.

Exports of semiconductors are likely to surge 17 percent thanks to expected computer replacements and high demand for netbooks on the heels of the release of Windows 7. Production of semiconductors is expected to gain six percent as rivaling nations delay their facility investments, hampering the speedy expansion of supplies.

Imports of semiconductors are predicted to soar 15.8 percent as the domestic production of system-on-a-chip (SoC), needed for digital home appliances and mobile phones, is not possible in S. Korea, and export markets for applied products continue to expand.

< Exports growth rates and shares >

<Electronics goods' market share >

< Comparisons of exports in post-crisis periods >

Source: KEA

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