Korean economy approaching ‘rock bottom’
HRI chief describes income-led growth policy as ‘complete failure’
We believe Korea’s economy started entering the declining phase in September 2017. It’s now nearing rock bottom.
Major economic data are indicating that the nation’s economy is now in a deep downturn. Deputy Prime Minister and Finance Minister Hong Nam-ki admitted during a recent media conference that the government is likely to fail to meet its economic growth target of 2.4 percent for 2019, saying growth would stand at between 2 percent and 2.1 percent for this year.
Korea managed to add more than 300,000 jobs for two consecutive months from August thanks to the government’s massive spending to create jobs in the public sector, but has still failed to create quality jobs, especially in manufacturing, for years. Those in their 30s and 40s have continued to lose their jobs for months.
Major think tanks and credit ratings agencies are now warning of the possibilities of Korea slipping into long-term recession with deflationary pressure emerging as a major risk for the nation’s economy.
Hyundai Research Institute (HRI) President and CEO Lee Dong-geun agreed Korea’s economy is in the darkest hours at the moment. He expects it to bottom out next year.
“We believe Korea’s economy started entering the declining phase in September 2017. It’s now nearing rock bottom,” Lee said during an interview with The Korea Times.
“The current downtrend is inevitable considering exports account for about 70 percent of Korea’s economy. It’s naturally vulnerable to external factors. The Sino-America trade row is lasting longer than anticipated. And another trade dispute between Korea and Japan has added the fuel to fire.”
Despite its current downturn, however, Lee disagreed with a series of mainstream media claims that Korea is entering a Japan-like recession driven by long-term deflation.
“The inflation rate plunged below the 0 percent mark in August. The trend is likely to continue for a while. I understand mounting fears about a possible long-term recession as Japan has been going through. It is worth monitoring the situation now, but Korea just isn’t there yet,”
Hyundai Research Institute (HRI) President and CEO Lee Dong-geun he said.
The veteran economist said that the Korean economy will get back on the recovery track in 2020 citing the latest outlook by the International Monetary Fund (IMF). The IMF forecast Korea’s economy to grow 2.2 percent next year.
“I agree with the IMF’s outlook. Next year will be better than this year,” Lee said. “There are several favorable factors. Korea holds a general election next April. The U.S. also holds a presidential election next year. These will boost the economy to a certain degree,” Lee said.
HRI also forecast in its study that the local economy would grow 2.2 percent for 2020. Despite the think tank’s somewhat optimistic outlook for next year, Lee claimed the government should foster a more favorable business environment for firms.
“I wouldn’t give an A grade for the government’s economic policies,” Lee said.
“The low inflation rate trend isn’t the crux of the matter in Korea’s economy. Korea’s unfavorable business environment is rather a bigger obstacle dragging down the economy.”
He advised the government to change its anti-enterprise sentiment immediately.
“Firms are facing tough challenges from outside. Korea’s economic structure depends heavily on the manufacturing sector and its exports. The nation’s manufacturing sector is confronting stiff challenges from its Chinese counterparts amid wide-spreading protectionism worldwide,” Lee said.
“Challenges are also coming from inside. Opportunity costs in Korea are now higher than most countries in the world, while domestic demand is worse than ever before. Firms are downsizing their investment as well as hiring.”
He said the Moon Jae-in administration’s signature “income-led growth policy’ should be readdressed.
“It’s a complete failure,” he said. “Wage hike does not immediately lead to consumption in an open economy, especially in an export-centered economy like Korea. The government’s pressure to implement the 52-hour workweek is also imposing tremendous pressure on firms, especially smalland medium-sized ones. These won’t help the nation’s economy at all.”
The Sino-America trade dispute has seemingly - again — reached a breakthrough as Washington and Beijing announced last month that they had reached a tentative agreement for the “first phase” of a trade deal, with China agreeing to buy up to $50 billion in American farm products, and to accept more American financial services in its market, with the United States agreeing to suspend new tariffs.
Despite the current thawing in trade between two major economies,
Lee said Washington and Beijing are likely to continue their competition for global hegemony for some time.
“Their competition for economic hegemony is likely to continue even after the U.S. presidential election,” he said.
“This is inevitable. We are on the verge of entering a bipolar world order from an economic viewpoint. The two will continuously vie for economic hegemony.”
Unlike Washington and Beijing’s economic tug-of-war, the ongoing trade dispute between Korea and Japan is likely to be eased soon, Lee claimed.
“This was driven politically. Neither economy suffered damage due to the trade dispute. A number of Japanese people are still visiting Korea while Korean customers are easing their boycott of Japanese products,” he said.