South Korea—Solid manufacturing recovery benefits Australian exports
South Korea’s economy, the third largest export market for Australia, grew 1.8% year-on-year in the first quarter of 2021, and is now above its pre-pandemic size. Exports are leading the recovery, and continue to surge through May, up more than 80% year-over-year for the first 10 days of the month, as Korea benefits from the recovery in global trade. Exports of semiconductors, computer chips and automotive are growing strongly, while telecommunication exports are rising on the back of increasing remote learning and work. South Korea’s export-manufacturing recovery is boosting demand for Australia’s iron ore, metallurgical coal and LNG, a trend that is likely to continue (Chart).
Outside of commodities, Australian exports of agriculture, manufacturing and other goods to South Korea are slightly lower than in previous years, reflecting South Korea’s lagging domestic demand recovery. But signs of improvement in private consumption and business investment in the first quarter suggests non-resources exports are likely to pick up this year. Koreans are moving more freely, the vaccine roll-out appears to be gathering pace and consumer and business sentiment are back to pre-pandemic levels. Although rising household debt and house prices could prompt some policy tightening, fiscal and monetary policy are likely to remain accommodative in 2021.
Beyond the pandemic, South Korea’s long-term focus on boosting “green” and “digital” investments is positive for Australian exports. For example, the South Korean government’s aim to lift renewable energy generation from 7% to 30-35% by 2040 provides opportunities for traditional Australian energy and resources exports. Emerging sectors, such as rare earths, are also likely to gain; South Korea is a global leader in manufacturing lithium batteries, which provides opportunities for Australian supplies of lithium, cobalt, nickel and graphite. Rare earths will also be an important input in the growing magnet and electric vehicles sectors.
