Korea needs another route for growth
SINGAPORE — South Korea should develop a new growth driver to pull the economy out of its low growth trap and catch up with the world’s richest economies, such as the U.S., according to Tim Condon, chief Asian economist at ING.
He said that export-dependent countries like Korea should come up with new strategies to survive in the age of the “new normal” where global trade growth will continue to be subdued.
“I think world trade growth might be converging to world industrial production growth and that’s the new normal,” said Condon in a recent interview held on the sidelines of The Emerging Asia Economic Forum 2016 co-organized by INSEAD Emerging Markets Institute and the Institute of International Finance.
“So countries such as Korea that used export-led growth to escape from the middle-income trap need to find other routes (to stimulate growth),” he added. “They need to use domestic spending.”
The Singapore-based economist pointed out that growth at the upper 2 percent level is now normal for Korea but something has to change to get back to the previous growth numbers.
He added that unless Korea finds a new engine to replace exports and raise growth potential, it is likely that Korea will fall further behind other advanced economies in the years to come.
Citing weakening growth potential, he said, “Korea faces some structural headwinds, such as an aging population. These sorts of things are going to make it difficult for Korea to converge on the OECD income frontier, the richest of the rich.”
He expects that under Donald Trump’s presidency, the U.S. economy is expected to go back to 3 percent growth at least for a short period, which will boost other rich economies. “If the frontier is moving and the U.S. is driving the frontier but Korea stays at 2 percent, Korea can fall further and further behind,” he said.
“What that means is that Korea can no longer rely on export-driven growth. It really has to stimulate domestic demand,” he added. “It hasn’t been able to do that.”
Condon stressed that Korea needs to come up with new measures to bolster domestic demand other than just boosting the real estate sector.
“The only supply response I can find to (Korea’s) policies today are in the real estate sector. In the manufacturing sector, businesses hold more inventory because interest rates are so low,” he said.
He also warned that Korea could follow in the footsteps of Japan, noting that Tokyo has failed to really shift the engine of growth to domestic consumers or spenders.
“My baseline is the Japan scenario for Korea. Over time, very low inflation and slow growth would make Korea continue to cut interest rates,” he said.
The veteran economist said that the Bank of Korea will have a policy dilemma in 2017 as a result of a series of rate hikes by the U.S. Federal Reserve.
“Our baseline of anaemic growth and below-target inflation keeps us thinking the BOK’s next move is down. However, the prospect of Fed rate hikes complicates things,” he said.
“A widening scissors between short-term U.S. and Korean rates raises the swap market cost of the U.S. dollar,” he added. “We expect the BOK to remain on hold through 2017.”