© YONHAP News

The Korean economy began 2018 with strong hopes but but is set to wrap up the year with worries. 

Korea held the snap presidential election in May last year to reduce political uncertainties and achieved a better-than-expected economic growth of 3.1 percent. 

This year, on the other hand, the domestic economy has dealt with new challenges both inside and outside the nation, such as the introduction of the 52-hour workweek and the escalating trade war between the U.S. and China. 

Today, we’ll examine some important issues in the Korean economy this year and its outlook on the future. First, Sung Tae-yun(성태윤), economics professor at Yonsei University, gives his analysis of the local economy in 2018. 

The Korean economy overall has been on a downward trajectory this year. Domestically, industries have been rather unstable due to weakening national competitiveness and rising labor costs. Along with unfavorable external factors including the trade conflict between the U.S. and China, major economic figures have worsened 

The government has tried to improve the situation through its fiscal policy, which deserves praise in some way. Still, corporate investment remains sluggish, while exports depend extremely on particular industries like semiconductors. In a worrying sign for Korea, there are growing concerns about a possible end to the semiconductor boom. While industries are losing competitiveness on the whole, Korea has yet to explore any clear promising industries. Simply put, the economy is not in good shape.

Major economic institutions have revised projections of Korea’s economic growth downward. The government lowered its growth forecast for this year to 2.9 percent, the International Monetary Fund or IMF to 2.8 percent, and both the Bank of Korea and the Organization for Economic Cooperation and Development or OECD to 2.7 percent, all lower than earlier projections. These downward adjustments are seen as a warning of internal and external risk factors and weak economic indexes. 

Major economic agencies, including the IMF, are especially worried about dismal job numbers in Korea. If the employment situation continues to worsen, income levels and consumption alike will remain low. Decreasing consumption will then discourage businesses from making an investment. The bearish investment sentiment has been one of the most disturbing parts in the economy since last year. Corporate investment is highly crucial: it is described as an engine of the economy. With the economic engine failing, the domestic economy faces a downturn. 

As pointed out by Kim Gwang-seok(김광석), professor at the Graduate School of International Studies at Hanyang University, the bad employment numbers are the most important metric that explains the sluggish economy. According to the government’s economic policy line announced December 17, on-year job growth in 2018 was estimated at 100-thousand, the lowest level in nine years. The grave job situation has lowered income levels and shrunken consumption. By and large, production, domestic demand and investment are all decreasing. 

Moreover, shorter work hours and a steep minimum wage hike are aggravating the employment situation further. Here again is Professor Sung. 

A 10.9 percent hike in the minimum wage in 2019 following a 16.4 percent increase this year means a nearly 30 percent hike over two years. No doubt, this will take a serious toll on a number of industries. 

The enforcement of the 52-hour workweek will also place a significant burden on companies, since those who violate the regulation are subject to heavy criminal penalties. In response, companies are expected to choose to automate production facilities rather than take costly action to hire additional workers. The move is expected to worsen the country’s already dire job market. This year, the labor market and other economic indicators have been deteriorating.

The full implementation of the 52-hour workweek as well as another 10.9 percent increase in the minimum wage next year is proving alarming for Korean businesses. 

Companies with 300 or more employees have been required to cut their maximum weekly working hours to 52 since July of this year. Designed to improve work-life balance, the new policy is rather progressive in a society where long work hours are considered the norm.

However, there are downsides. The working hour limit on top of the 16.4 percent increase in the minimum wage this year has forced many small firms and the self-employed to lay off their workers or even close their business. 

Outside the country, meanwhile, the U.S. and China have engaged in a fierce trade war. Professor Sung continues. 

The U.S. and China are Korea’s most important trade partners, so the trade conflict between the U.S. and China is certainly bad news, as 27 percent of Korea’s outbound shipments depend on China. Korea mainly exports intermediary goods to China and they are used to produce finished goods shipped to the U.S. Therefore, a setback in China’s exports to the U.S. due to the trade row will inevitably affect Korean shipments.

It is uncertain whether the trade war will end anytime soon, and this external risk heightens uncertainties about Korea’s overall exports. 

The U.S.-China trade war began in earnest in March, when U.S. President Donald Trump signed an executive order imposing 25 percent tariffs on 50 billion dollars worth of shipments from China. Beijing hit back immediately, levying retaliatory tariffs on American goods worth 3 billion dollars.

The two countries held trade negotiations three times in May and June but failed to reach a compromise. In July, the two sides upped the stakes further, each slapping 25 percent duties on 34 billion dollars of each other’s exports. 

Korea, the world’s seventh-largest exporter, has responded sensitively to the aftermath of the trade conflict between the two major economies, which have much to do with Korea’s main exports items like semiconductors, automobiles and display products. For Korea, the trade war has been an extremely unfavorable factor. 

Despite the difficulties, however, Korea’s exports have remained strong. According to the October balance of payments announced by the Bank of Korea, the nation recorded a trade surplus of 9.19 billion US dollars in October this year. Korea’s current account has been in the black for 80 consecutive months since March 2012. The sustained performance is partly attributable to the fact that exports in October amounted to a record high of 57.24 billion dollars. The lion’s share of the country’s exports was semiconductors, as expected. 

It is certainly good news that semiconductor exports accounted for 20 percent of Korea’s outbound shipments for the year, a record high for the industry. Samsung Electronics earned more than 15 billion US dollars of operating profits in the third quarter. During the same period, Korea’s No. 2 chipmaker SK Hynix posted an all-time high quarterly performance for sales, net profits and operating profits.

Some global investment banks forecast that the boom in the semiconductor industry will soon come to an end, but the robust sales of memory chips eased these concerns to some extent. 

As Professor Kim explained, Korea once again demonstrated its status as a semiconductor powerhouse this year. The accumulated sales of semiconductors during the first ten months of 2018 exceeded 100 billion US dollars for the first time. On the back of these numbers, Korea posted a trade volume of more than 1 trillion US dollars for two consecutive years. Exports, in particular, topped 600 billion dollars for the first time ever this year, 14 years after the nation’s outbound shipments surpassed 200 billion dollars in 2004. 

In another piece of good news for the Korean economy, three Korean mobile carriers launched fifth-generation or 5G services at midnight on December 1, heralding a new era in high-speed broadband. Professor Kim elaborates.

The generational shift from the current fourth-generation or 4G network to 5G will be dramatic. 5G promises to offer extraordinary data transmission speed—20 to 70 times that of current 4G technology. Videos, pictures and messages can be delivered in an instant. A 90 minute movie can be downloaded in a single second.

5G can deliver data-heavy content like virtual reality and augmented reality. In the 5G era, self-driving cars will run on the road and drones can fly in the sky. It is easy to imagine various 5G-based services and industries will be created, just as the Internet gave rise to many new businesses. 

The next-generation 5G network boasts speeds at least a 20 times faster than the 4G or LTE network. Theoretically, the new network could handle 1 million Internet of Things or IoT device connections per square kilometer. It can also support new technologies like VR, AR and autonomous vehicles. 

The successful launch of the world’s first commercial 5G network is a clear indication that Korea is a leading player in tomorrow’s major industries.

Expectations are also running high for peace-building efforts on the Korean Peninsula and their positive impact on the economy. Let’s hear again from Professor Kim. 

South Korea’s credit ratings remain relatively high despite the geopolitical risks on the Korean Peninsula. Absent North Korea, however, the credit ratings of South Korea could rise even higher, which could mean more foreign investment. 

Hopes are growing that the Gaeseong Industrial Park in North Korea will resume operation and a second and third such complex can be created. South Korean companies may participate in the projects of building telecommunications networks and infrastructure in North Korea. Construction could be another lucrative business, while various tour programs can be launched in the North. In brief, an improvement in cross-border relations will provide a lot of business opportunities to South Korea. 

A favorable mood for dialogue created by three inter-Korean summits and the North Korea-U.S. summit this year is a great chance for South Korea to turn the so-called Korea discount into a Korea premium. Without a doubt, solid peace on the Korean Peninsula will ease North Korea-related risks that have undervalued the South Korean market. South Korea has been mired in low growth, with saturated domestic market. But if South and North Korea enhance bilateral economic cooperation, the South might be able to identify new engines of growth.

Of course, North Korea should first take sincere denuclearization measures and international sanctions on the North should be lifted as well over the long term. For now, it is more urgent for the South Korean economy to overcome a number of domestic risk factors.

Despite government efforts to create jobs, its employment policy seems to have failed to produce results. 

In the past, Korea had a competitive edge in such industries as automobiles, shipbuilding, semiconductors and petrochemicals. But the former two have experienced difficulties lately, particularly small-and mid-sized firms. It is necessary to develop new, competitive industries to generate additional jobs, but Korea has failed to do so, adding difficulties to the already struggling economy. 

As Professor Sung pointed out, sluggish employment and weakening industrial competitiveness are expected to drag the Korean economy down next year. 

On the positive side, though, a rise in workers’ income, more leisure time as a result of shorter work hours, the government’s support measures for low-income earners and reduced geopolitical risks will likely contribute to boosting private consumption. However, a contraction in the labor market is feared to restrict recovery in consumption. 

Internal and external economic conditions are also expected to continue to worsen next year. Professor Kim explains.

I think there are more negative factors than positive ones. Outside Korea, unfavorable factors include growing uncertainties in emerging economies, the possibility of an economic crisis triggered by emerging markets, China’s heavy debt – often described as a “gray rhino” threat, potentially weakened solidarity within Europe following Britain’s departure from the European Union, the trade dispute between the U.S. and China, and the continuing interest rate hikes in the U.S.

Domestically, Korea faces serious problems such as disappointing job numbers, low birthrates and a rapidly aging population. The Korean economy will have to deal with plenty of challenges in 2019. 

Risk factors in the global economy next year include the protracted trade conflict between the U.S. and China, the slowing world economy, confusion stemming from Brexit and possible financial jitters in emerging economies. 

Inside Korea, household consumption is expected to weaken amid deteriorating employment conditions, while indebted households will find it even more difficult to finance debt. Other downside risks include falling asset prices and continuing sluggish performances in construction and facility investment. 

Reflecting a gloomy outlook next year, the government predicts that the economy will grow 2.8 percent in 2019, while growth forecasts by nine major global investment banks for next year’s Korean economy averaged 2.6 percent. 

Next year, the domestic economy is expected to face more difficulties than this year, but Professor Sung says this is all the more reason why Korea should improve its economic fundamentals.

It is true that the government’s clumsy policies came as a shock to the Korean economy, which was already struggling. It is necessary to revise the policies in a way that enables exploration of new high growth industries for Korea’s economy.

If the past is any guide, Korea has experienced crisis and economic recession several times but managed to rebound and grow again by effective industrial restructuring. The government should devise feasible policies while the private sector innovates. When formulating economic policies, the government must take market conditions into full consideration. Companies and individuals, for their part, should refrain from risky investment and keep restructuring unprofitable businesses, while developing new and innovative business items.

The keyword for the 2019 Korean economy is “crossroad”: If the nation steers the economy properly, it can move forward. If not, the economy may fall into a downward spiral. 

Thankfully, there are hopeful signs. Korea has embraced a new 5G era, and new industries may emerge as tensions geopolitical tensions cool on the peninsula. Policy adjustments may set the stage for advancement into innovative industrial sectors, and the global appeal of Korean pop culture serves as another positive factor for the Korean economy. By using these opportunities, the nation may overcome its current difficulties. 

As a matter of fact, the Korean economy has demonstrated immense dynamism when faced with crisis in the past. By its challenges head on, 2019 will be remembered as an economic turning point in Korea.