South Korea’s economy cooled in 2023, with global demand for exports declining to an estimated 1.4%, geopolitical challenges, and weakening domestic demand. Despite expected growth in 2024, South Korea’s long-term economic growth will be impacted by structural challenges from changing demographics. Exports and imports declined, with only automotives and ships seeing growth. Memory chip exports were down 30.6% for the year, though they began to recover in October.
Despite a 11% decrease in imports, South Korea recorded a trade deficit for the second consecutive year since the late 1990s. High energy costs and trade with China were primary factors. Energy imports declined by 22% in 2023, but costs for crude, LNG, coal, and other petroleum products remained above levels before Russia’s invasion of Ukraine. The high costs of geopolitical concerns, including a spike in prices during the Israel-Hamas war, were primarily attributed to these factors.
South Korea’s transition away from Russian fossil fuels led to a decline in mineral fuel imports from Russia by 50.7%. The country has replaced Russian crude oil with increased imports from Saudi Arabia, Qatar, and the United Arab Emirates, while Australia and Malaysia have seen LNG exports grow. South Korea’s largest trading partner, China, saw exports decline by 20% to US$124.8 billion in 2023.
South Korean semiconductor firms, heavily invested in China, face increased risks from US export controls. The US designated Samsung and SK Hynix as validated end users in 2023, resolving concerns about the viability of South Korean semiconductor factories in China. The Inflation Reduction Act (IRA) in the US in August 2022 discriminated against South Korean firms, leading them to invest more in the US than in the European Union or any other country under the law.
Despite these concerns, regulatory adjustments to the law’s provisions related to leasing commercial EVs have helped Hyundai and Kia’s combined EV sales grow by over 60%. South Korea saw exports of EVs and eco-friendly cars jump over 50% in 2023, with total exports exceeding 1 million units. China’s own trade restrictions, including new export controls for graphite, gallium, and germanium, have increased supply chain risks. Beijing’s partial ban on US semiconductor firm Micron has also put Seoul under pressure to not backfill any lost semiconductor supply in China.
South Korea is focusing on strengthening its cooperation with the US on supply chains, minerals, and green technologies due to geopolitical risks. South Korea is enhancing trilateral cooperation with the US and Japan on supply chain early warning systems and technology, while its economy is projected to grow by 2.2% in 2024.
However, the country’s potential growth rate is expected to decline to 1.7% this year due to demographic changes. The working-age population is expected to fall from 37.4 million in 2020 to 24.2 million in 2050. Without addressing this decline, South Korea’s growth potential is expected to decline to below 1% annually by the 2030s. These demographic changes will have a longer-term impact on the country’s economy in the future.
