[Contribution] Shortages are going away: What will this mean for Korean exports?

[Contribution] Shortages are going away: What will this mean for Korean exports?

By Stephen Lee

[Contribution] Shortages are going away: What will this mean for Korean exports?

Stephen Lee is the chief economist at Meritz Securities, Seoul. Courtesy of Stephen Lee

It’s been 18 months since the COVID-19 pandemic heavily hit the economies of developed nations. In the U.S., the recession lasted for a mere two months, but it turned out to be the deepest one in history. As the economy began to show signs of recovery after the short recession, the demand for services only crumbled before recently recovering. Manufacturing, on the other hand, has enjoyed the fastest recovery ever, as demand for devices and IT investments surged. If we were to set U.S. real retail sales as a proxy for goods demand, and U.S. industrial production as a proxy for supply, the former is above the latter by 11 percent as of July 2021, if we rebase the two indicators to Feb. 2020.

This situation amounts to excess demand vis-a-vis supply, but naming it from the other way around, it’s called “shortages.” The supply has not been able to catch up with the surging demand because of its inelastic nature. Rising commodity prices, global supply-chain disruptions, as well as labor shortages ― in some cases, voluntary unemployment on the back of stimuli, and in others due to difficulties in finding or transitioning to different jobs ― have made the situation even worse.

A gauge for a shortage, measured in the form of the U.S. ISM Manufacturing Supplier Delivery Index, rose to 78.8 in May 2021, the highest since 1974. The gauge came down for three straight months as commodity price pressure eased and workers returned to work. The shortages have not been completely resolved but they are likely passing their peak. What does this mean for production? Previously, production lagged against orders, but it’s now starting to catch up. Wholesalers and retailers will now be able to fill their inventories. As a result, shipments and deliveries will rise and recover ― a good phenomenon for global trade.

Longer capital expenditure growth cycle will follow

In my view, the resumption of shipments and deliveries is not the end of recovery. Beyond that, we will likely get to see a longer capital expenditure growth, or “capex,” cycle. History tells us that whenever the supplier delivery index rose above 60, it was perceived as shortages, or excess demand. Once manufacturers realized that excess demand existed, they got more proactive in substituting old items for new ones, and if needed, built capacities. There were three similar cases before COVID-19: 1995-99, 2003-06 and 2017-18.

One might say that it is premature to directly compare previous episodes with the current one, as past three- to four-year-long capex cycles had special features like the IT boom and the emergence of China. We do not have these new engines now, but supply tends to rise gradually upon the change of corporate policies. I believe that reducing the widening gap between demand and supply created by one of the most severe shortages in history will take two years or more.

History shows that prolonging capex cycles have resulted in continuous rises in global trade volumes. Shortages in the U.S. do not mean that manufacturers there will only be buying equipment made at home. Machines and devices are tradable goods; therefore, those countries with capital goods-based export structures can benefit also. In Asia, these countries include Korea, Japan and Taiwan. During previous capex cycles, the global goods import volume increased at an annual average pace of 7.3 percent and 9.0 percent during the 1995-99 and 2003-06 cycles, respectively.

Global environment in favor of Korean exports

Amid such a global environment demanding capital goods, Korean exports are currently growing, characterized by much better quality than in 2017-18. Korean exports back then were driven by IT, commodities and industrials in the first place. But soon, these exports turned out to be heavily dependent on semiconductor prices. This time, as global macros suggest, Korean export recovery is being driven by both volume and unit price. Greater demand for devices and equipment are leading volume growth, while a greater volume of exports for products with higher ASPs (average selling prices) are driving up unit value as well. These are: 1) MCP (multi-chip package) and System LSI (large-scale integration) semiconductors; 2) OLED (organic light emitting diodes) flat displays; and 3) SUV, luxury car and EV (electric vehicle) automobiles.

Of course, going forward, many forecasters may argue that on-year export growth will slow. Such a slowdown is natural as base effects fade. What is more important is the sustainable growth pace. One simple way of gauging this pace is to reconvert export growth to a 2-year CAGR (compound annual growth rate) basis. The daily average exports growth in August was 29.0 percent, down from 49.0 percent in May. Two-year CAGR growth on the other hand, was 11.2 percent as of August, slightly up from 10.3 percent in May. We should consider near 10 percent growth as the sustainably growing pace of Korean exports.

To sum up, given global manufacturers’ high demand for devices and equipment to meet the balance between demand and supply after shortages peak out, the double-digit growth of Korean exports is likely to continue into next year. This growth will be the main factor sustaining the nation’s GDP growth above 3 percent in 2022.

The writer is the chief economist at Meritz Securities, Seoul

Internet Explorer Channel Network
News Related

OTHER NEWS

Gov't considering temporarily lowering fuel taxes, tariffs on LNG: finance minister

SEOUL, Oct. 26 (Yonhap) — The government is considering temporarily lowering fuel taxes amid soaring oil prices, Finance Minister Hong Nam-ki said Tuesday, as it seeks to cope with inflation ... Read more »

Beijing presses McDonald's to support digital yuan in time for Winter Olympics

Beijing wants McDonald’s to get more of its restaurants to support China’s digital yuan. China is pressing the fast-food retail chain McDonald’s, Visa, and Nike to support the digital yuan ... Read more »

S. Korea's economy grows estimated 0.3 pct on-quarter in Q3

SEOUL, Oct. 26 (Yonhap) — South Korea’s economy is estimated to have grown 0.3 percent on-quarter in the third quarter, central bank data showed Tuesday, raising worries it will not ... Read more »

(URGENT) South Korea's economy grows 0.3 pct on-quarter in Q3: BOK

(END) Read more »

Hainan launches large-scale head hunting project for Free Trade Port

The program will cover not only China's regions, but also foreign markets Read more »

Russian media watchdog prepared 16 protocols against Google — Deputy Head

The fine can be from 1/20 to 1/10 of company’s annual revenues Read more »

Moderation in Eastern languages reveals Facebook's technological problems — senator

According to the report, Facebook employees and algorithms subjected statements in Arabic to excessively harsh moderation, erroneously taking them for political calls Read more »

Changes in global energy balance must be reasonable and gradual — Novak

According to Russian Deputy Prime Minister, Russia sees gas as the cleanest hydrocarbon energy source with tremendous potential Read more »

Russian gas complies with European climatic requirements, Gazprom says

Deputy CEO Elena Burmistrova also noted that use of the new Nord Stream 2 gas pipeline would make it possible to reduce the carbon footprint on account of eco-friendliness of the route Read more »

Google failed to remove over 2,600 illegal materials by early October — lawmaker

Vasily Piskaryov recalled that, during the meeting with the company's management in April, this number stood at over 5,700 Read more »

Facebook allowed politicians, celebrities to flout rules, report reveals

It is reported that the company's management intervened to allow US politicians and celebrities to post anything without any restrictions Read more »

Bank of Russia does not rule our lower profits of banks in 2022

At the end of 2021, the regulator forecasts a record profit for the banking sector of around $35.75 bln Read more »

Nord Stream 2 certification requires legitimacy for exploitation, says German ambassador

The construction of Nord Stream 2 was fully completed on September 10 Read more »

Balinese wedding gowns unveiled at multicultural museum at Seoul

Charge d’ Affaires Zelda Wulan Kartika of the Indonesian Embassy in South Korea and Multiculture Museum Director Kim Yun-tae officially launching the Indonesian Pavilion at When K Fashion Meets Traditional ... Read more »

Gazprom supplies gas to Europe in accordance with consumers' requests under contracts

Earlier, it was reported that gas pumping via the Yamal-Europe gas pipeline was down at 333,000 cubic meters per hour by Monday morning Read more »

Russia-Moldova gas talks to continue on October 27 in Russia, says Moldovan Deputy PM

Following the talks on a new contract on gas deliveries to Moldova the Russian side announced that the republic's debt was worth $433 mln, or $709 mln considering overdue payments Read more »

LNG demand to rise 25-50% by 2030: Morgan Stanley

Samsung Heavy Industries’ LNG carrier / Courtesy of Samsung Heavy Industries Demand for liquefied natural gas (LNG) is expected to rise by 25 percent to 50 percent by 2030, making ... Read more »

Takeaways from Nirmala Sitharaman's successful United States visit

Finance Minister Nirmala Sitharaman Malachy Nugent and Akshobh Giridharadas Finance Minister Nirmala Sitharaman had a busy week along the Eastern Seaboard of the United States, traversing from Boston to the ... Read more »

[Diplomatic Circuit] Kazakh Deputy PM hold talks on joint economic projects with Korea

Kazakhstan Deputy Prime Minister Roman Sklyar addresses a roundtable supported by Korea Health Industry Development Institute on Thursday in Seoul.Kazakhstan and South Korea are seeking ways to deepen economic ties, ... Read more »

Singapore companies ink two deals to import solar power from Indonesia

SINGAPORE – Two Joint Development Agreements (JDAs) were signed on Monday (Oct 25) by Singaporean companies for import of solar energy from Indonesia. One of the agreements was inked by ... Read more »

Moon, Biden expected to meet on sidelines of G20 summit or U.N.

  President Moon Jae-in (Yonhap) President Joe Biden are expected to hold a bilateral meeting on the sidelines of a G20 summit in Italy or the U.N. climate summit in ... Read more »

Russia, Moldova should continue dialogue on gas, Moscow's position clear, says Kremlin

Moldova’s parliament has introduced a state of emergency from October 22 to November 20 due to gas deficit Read more »

International Consumer Products Expo to be held in Haikou on November 25-28

More than 1,000 Chinese and foreign enterprises will take part in the exhibition Read more »

[REVIEW] 'We miss you all so much': BTS's first concert in a year reignites passion and hope

Members of K-pop sensation BTS pose during their online concert Sunday. Courtesy of Big Hit Music By Dong Sun-hwa Over the past two years, the members of K-pop titan BTS ... Read more »

Korea Artist Prize finalists present visions for contemporary art

Installation view of “60 Ho” (2020), front, and “qbit to adam” (2021) by Choi Chan-sook / Courtesy of the artist and MMCA, Photo by Hong Cheol-ki By Park Han-sol While ... Read more »

SK pledges to create more jobs for young people

SK Group Chairman Chey Tae-won, right, attends the Youth Hope ON ceremony along with Prime Minister Kim Boo-kyum at a research center of SK hynix in Icheon, Gyeonggi Province, Monday. ... Read more »

Hyundai Motor chairman to support creation of EV ecosystem in Indonesia

Hyundai Motor Group Chairman Chung Euisun, left, poses with Indonesian President Joko Widodo, by an Electrified G80 sedan during a ceremony at Jakarta International Expo in Jakarta, Monday, to celebrate ... Read more »

(LEAD) SK Group vows to create 27,000 youth jobs over next 3 yrs: gov't

(ATTN: ADDS comments in paras 5, 8; CHANGES photo)By Joo Kyung-don SEOUL, Oct. 25 (Yonhap) — SK Group has promised to create 27,000 new jobs over the next three years ... Read more »

Young workers not entirely happy with 'return to normalcy'

Gettyimagesbank By Bahk Eun-ji Expectations are high that people will be soon able to enjoy “normal lives” like before the COVID-19 pandemic, as the government is preparing for a scheme ... Read more »

KT to help businesses expand AI customer service calls

A smartphone screen shows technology employing artificial intelligence (AI) developed by KT for automatically dealing with customer calls. Courtesy of KT By Yi Whan-woo KT, the country’s telecommunications operator, said ... Read more »

Moon pledges last-ditch effort to bring normalcy back

President Moon Jae-in delivers a speech at the National Assemsbly in Seoul on Monday. (Cheong Wa Dae)President Moon Jae-in on Monday pledged a last-ditch effort to bring normalcy back and ... Read more »

Samsung's de facto leader vows to reinvent Samsung at memorial event for late father

SEOUL, Oct. 25 (Yonhap) — Samsung Group’s de facto leader Lee Jae-yong vowed Monday to work toward reinventing the South Korea’s largest conglomerate in his first public message after being ... Read more »

[ANALYSIS] Korea seeks US support for 'backbone industries'

U.S. President Joe Biden holds up a silicon wafer in the Roosevelt Room of the White House, April 12, during the virtual CEO Summit on Semiconductor and Supply Chain Resilience. ... Read more »

'Lost' actors share their thoughts on series' wrap

Actors Ryu Jun-yeol, left, and Jeon Do-yeon pose during an online press conference for the JTBC series “Lost,” Sept. 2. Courtesy of JTBC By Lee Gyu-lee Actors Jeon Do-yeon and ... Read more »

Curfews on cafes, eateries to be lifted in November

A street in Myeong-dong in central Seoul is crowded with people during lunch time, Monday. The Ministry of Health and Welfare announced its draft to plan on the transition to ... Read more »

Kakao Pay affirms trust in AliPay

Kakao Pay CEO Ryu Young-jun answers questions during an online press conference, Monday in Seoul. Yonhap By Kim Yoo-chul A top executive at Kakao Pay dismissed concerns that its share ... Read more »

LG vice chairman to lead battery affiliate

LG Chief Operating Officer and Vice Chairman Kwon Young-soo, front row right, is seen next to President Moon Jae-in, center, during a presidential visit to LG Energy Solution’s battery manufacturing ... Read more »

1st anniversary of death of Samsung chairman

Samsung Electronics Vice Chairman Lee Jae-yong, right, appears at a memorial ceremony marking the first anniversary of the death of his father, Samsung Group Chairman Lee Kun-hee, at a family ... Read more »

Citibank Korea confirms shutdown of retail banking operations

Employees of Citibank Korea sit behind a counter at the company’s head office in Seoul in this file photo taken on April 19. Yonhap Citibank accepts voluntary retirement amid phased ... Read more »

Woori Financial Group Q3 net income up 58.1 pct. to 824.7 bln won

SEOUL, Oct. 25 (Yonhap) — Woori Financial Group Inc. on Monday reported its third-quarter net profit of 824.7 billion won (US$705.9 million), up 58.1 percent from a year earlier. Operating ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic