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2024-03-22
The International Monetary Fund or IMF has downgraded this year’s growth outlook for South Korea to 2.8 percent, and next year’s 2019 outlook to 2.6 percent. Both are lower than projections set by the Korean government and the Bank of Korea, stoking concerns of slowing economic growth. Here is Gwak Su-jong(곽수종), economics professor at George Mason University Korea, to give his analysis of the current state of the Korean economy.
The IMF makes revisions of its growth estimates on a quarterly basis. In its World Economic Outlook report released on October 9, the agency lowered its growth outlook for South Korea for this year from 3 percent to 2.8 percent and for next year from 2.9 percent to 2.6 percent.
Noting the effects of the ongoing trade dispute between the United States and China, unstable financial markets of emerging economies, and a continuous rise in interest rates in the U.S., the IMF believes that these factors are negatively affecting the export-reliant Korean economy.
The IMF slashed its growth forecast for South Korea by 0.2 percentage points for this year and by 0.3 percentage points for next year from its previous projections in April. As risk factors, it cited the trade conflict between the U.S. and China and the possibility of capital outflow from emerging markets due to a rise in U.S. interest rates.
This comes after the Asia Development Bank forecast last month that the South Korean economy would expand 2.9 percent this year and 2.8 percent next year, down 0.1 percentage points, respectively, from its earlier estimates in July. Similarly, the Organization for Economic Cooperation and Development or OECD cut South Korea’s growth projection to 2.7 percent in September, 0.3 percentage points lower than its forecast four months earlier. Professor Gwak says that external uncertainties lie behind these agencies’ downward revisions on South Korea’s outlook.
The U.S. has raised, frozen and then raised again its interest rates since December 2015, and the gradual upward trend is expected to continue. The rate hike means that the American economy is in good shape.
Some may think that the trend will benefit the Korean economy, as South Korea’s exports to the U.S. account for 13 percent of its overall overseas sales. But Korea’s combined shipments to China and Southeast Asia make up 55 percent of its total exports. If the trade war between the U.S. and China continues, it will inevitably deal a blow to China and also to South Korea as well, since China comprises a significant portion, or 25 percent, of Korea’s entire exports.
Rising U.S. interest rates jolted global financial markets last week when the yield on the benchmark 10-year Treasury note hit its highest level since 2011. As a result, the Korea Composite Stock Price Index or KOSPI plunged over 4 percent on October 11 to an 18-month low. Shares in major Asian markets such as Japan, China, Hong Kong and Taiwan also fell more than 3 percent.
To make matters worse, the Sino-U.S. trade row is showing signs of protraction, boding ill for the global economy.
In July, the IMF predicted that the global economy would grow at 3.9 percent this year, estimating 2018’s growth outlook for advanced countries at 2.4 percent and emerging economies at 4.9 percent. But recently, the agency trimmed its predictions for the global economy by 0.2 percentage points to 3.7 percent. The figures for advanced economies and emerging countries have also been downgraded to 2.2 percent and 4.7 percent, respectively. It seems the IMF is keenly aware of the aftermath of the trade war between the U.S. and China.
If Trump’s Republican Party retains control of Congress in the upcoming U.S. midterm elections on November 6, the U.S.-China trade war may further intensify. That’s because Trump may interpret his country’s tense relations with China as necessary to maintain America’s strong economic numbers and thus improve his chances of winning re-election in 2020. Trump will certainly try to address the problem of 300 billion US dollars of a trade deficit with China.
In the process, China will almost certainly face difficulties. Domestically, China should brace for the possibility that financial problems triggered by the shadow banking system and real estate bubbles will affect its economy.
According to the Bank of Korea, a prolonged trade dispute between the U.S. and China will reduce bilateral trade and lead to a 0.2 percent and 0.4 percent fall in the countries’ respective GDP. The setback will have a negative impact on the global economy, and a slowdown in global trade will take a toll on the export-dependent Korean economy.
Many analysts are concerned that a reduction in China’s exports to the U.S. as a result of Washington’s trade sanctions on Beijing will deal a blow to South Korea’s exports of intermediate goods to China. Perhaps more seriously, Korea has its own risk factors at home.
High levels of household and national debt are two of the most serious economic problems faced by South Korea. In an effort to remedy the situation, the government is increasing various taxes, including the comprehensive real estate holding tax. In my case, the tax rate for outside lectures was 4.4 percent in the past, but it has been raised to 6.6 percent now.
I’m especially curious how the self-employed and small business owners are coping with the burden of increased minimum wages. I imagine they have no choice but to offset the increasing costs by raising prices of goods or services they are selling. Increased prices typically slow domestic consumption. Then, the government’s “income-led growth” policy may backfire, and degenerate into “income-led downturn.”
Korea’s household debt reached one-thousand-493 trillion won or about 1.3 trillion US dollars as of the second quarter of this year, more than doubling from 2008. This is equivalent to 94.8 percent of GDP as of late 2017. A primary factor behind these figures is that the Korean economy has relied on debt to keep growth momentum afloat over the last ten years, dating back to the 2008 global financial crisis.
But at present, the nation is struggling to reinvigorate lackluster domestic demand, in part due to poor employment numbers and a construction industry slump. The IMF assesses that it will be difficult for South Korea to improve its job market next year amid rising inflation and an expected drop in its current account surplus due to a decline in exports. What can be done for the Korean economy?
The economy should avoid getting locked in a vicious circle, in which slow growth fails to create jobs, fewer jobs result in less income and less consumption, which in turn reduce investment, and little investment again leads to low growth.
The late founder of Samsung Group Lee Byung-chul announced a plan to invest in the semiconductor business in 1983 and South Korea first laid optical cables in 1985. Three decades later, Korea is now a semiconductor powerhouse and is ready to enter the fifth-generation or 5G network era. As seen in the examples, important projects for national or economic growth require long-term planning, and it is necessary to look ahead 20 to 30 years. But more importantly, the export-driven Korean economy should carefully monitor changes in the external economic environment.
Strengthening economic fundamentals will be the key to robust growth. To this end, the government needs to adopt a two-track approach by creating a national strategy with a long-term vision and responding to the external environment swiftly and effectively.
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