South Korea and Taiwan both reported better-than-expected economic growth last week, and in both cases it looks quite similar: Exports have boomed, domestic demand hasn’t. That has already caused some problems, which will be exacerbated if the trend continues unabated.
In South Korea’s case, exports of goods were 4.4% higher in the first quarter compared with the final quarter of 2019, before the pandemic hit. Meanwhile, private consumption spending is still languishing 5.5% below that benchmark.
It’s a similar story in Taiwan. Electronics exports in particular are up by 28.4% year-over-year, with net exports contributing far more to the overall 8.2% growth in gross domestic product than consumption.
For countries such as the U.S. and U.K., where large trade deficits are common, this might sound like a good problem to have. But imbalances in either direction can cause problems.
A large chunk of the problem comes down to the foreign-exchange market. Both Taipei and Seoul are loath to let the value of their currencies swell too high, which would pinch export competitiveness.
That sets up two risks down the line. First, foreign-exchange reserves have bulged, which puts the two export champions on a collision course with the U.S. over currency manipulation. That may not happen immediately, but the Treasury Department probably won’t remain silent indefinitely.
The second is more complex, but even more worrying for the long-term. The last thing the two central banks want to do is increase interest rates and add fuel to the fire under their currencies. But keeping interest rates so low and leaning heavily on monetary rather than fiscal policy to support demand will likely worsen financial vulnerabilities linked to the housing market.
The latest published figure for Taiwanese household debt was 86.7% of GDP, reported by the central bank for 2019. But the amount of total outstanding mortgage lending has risen by 10% since the beginning of the pandemic, suggesting the figure must have climbed further. According to the Institute of International Finance, South Korea’s figure is even higher, at 102.8% of GDP at the end of 2020. Those figures are high even by the standards of advanced economies.
Both governments have repeatedly attempted to cool their housing markets, knowing the destabilizing effect that high leverage can have. But when too much macroeconomic policy is based on an aversion to government debt and an over-prioritizing of export growth, vulnerabilities inevitably accumulate.
Write to Mike Bird at Mike.Bird@wsj.com
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