Moody’s calls for labor market reform
SINGAPORE — Global credit ratings agencies have called on President Moon Jae-in to push for labor reform in order to overcome economic challenges.
They also stressed the importance of employing more aggressive fiscal spending to boost domestic demand amid escalating geopolitical risks.
“The government should make headway with labor market reforms, in particular, addressing the high level of youth unemployment,” Katrina Ell, an economist at Moody’s Analytics, said in an interview.
She pointed out unemployment of college graduates is getting more serious as this is eroding Korea’s productivity and longer-term potential.
“This is not an easy fix and takes an ongoing commitment to better match the skills of recent university graduates with the demands of firms,” she said.
Ell said escalated tensions with North Korea are a downside risk to the outlook but the impact on the Korean economy and financial markets will be limited.
She pointed out Korean consumer sentiment has not been derailed by escalated tension with the North.
“President Moon began his term in May and it has involved the delivery of generous government spending and the hope of further economic and labor market improvements,” she said. “We expect a minor hit to consumption as Korean households digest the sustained and escalated North Korean threat.”
S&P Global Ratings economist Vince Conti said the Korean economy appears to have weathered ongoing challenges pretty well, noting Korea had a strong first half, driven by solid investment growth.
“We view this investment surge as at least partly driven by expectations of stronger trade volume in the latter part of the year, something that so far has not panned out as strongly as some analysts had been forecasting,” he said.
As such, in its baseline, S&P expects an inventory buildup to put a damper on investment and GDP growth in the second half of the year, with subpar external demand continuing to hold Korea’s GDP growth below 3 percent.
Conti expects that risks for sharp downturns could come from the trade side if a sharp slowdown occurs in China, or if global protectionism trends intensify, or from the financing side if markets are surprised by major central bank moves.
“In such scenarios, most of the policy support would need to come from the fiscal side,” he said.
In his view, the Bank of Korea (BOK) has limited space to further provide support.
“The BOK is already at record low interest rates. Moreover, the BOK is also concerned about the level and growth of household debt”
Fitch Ratings believes that an outright war on the Korean Peninsula will be averted. “While the current level of tensions is high, strains on the Korean Peninsula are not new, and have followed a familiar pattern of rise-and-fall cycles in the past,” the agency wrote in its report, Wednesday.
“It remains important to differentiate between the recent escalation of missile testing and aggressive rhetoric on the one hand, and the likelihood of war on the other.”