‘Applation’ and April general elections
Korea is hot with general elections’ fever as one of over 70 countries scheduled for elections this year. Political episodes, good or bad, come out every day. Some smile and some cry. The ruling party, the main opposition party and smaller parties have almost finished nominations. As numerous past election results have shown, the phrase, “It’s the economy, stupid,” still rings true. Major economic indicators and economics still have the final say in most cases.
A new sweeping buzzword that best depicts the economic distress Koreans face due to high consumer prices is “applation” (apple + inflation). Apples are the fruit that Koreans like the most and eat the most. However, Koreans sigh at the high price of apples. An apple costs 2,000 won ($1.50), whereas a big, high-grade apple costs as much as 10,000 won. Surging agricultural product prices, which jumped 20.9 percent year-on-year in February, pushed inflation upward again to 3.1 percent in the same month, up from 2.8 percent in January, rubbing salt into the wound. So the consumer sentiment index remains low at 94 points in February.
The unemployment rate increased to 3.7 percent in January from the annual average of 2.7 percent in 2023. Employment has fallen to 61 percent from 62.1 percent during the same period. One of the distinct features of 380,000 new jobs created is the lack of decent jobs for young people, mostly centered on services and older workers. Of 380,000 new jobs, 306,000 jobs were created in the service industry, along with 20,000 in manufacturing and 73,000 in construction. Most of the increase in the number of employed is led by those aged 50 or older. There was an increase of 421,000 people compared to the same month last year. However, jobs for young people have shrunk. The number of jobs for youth aged 15-29 decreased by 85,000.
Workers’ real wages have decreased since 2022. The outlook for purchasing power remains negative, with a 0.2 percent decrease in 2022 and a 1.1 percent decrease in 2023. Moreover, high interest rates have dampened not just business investor sentiment but also the consumption of households that are already fraught with high household debt. According to the Bank for International Settlement (BIS), as of the third quarter of 2023 Korea’s household debt reached 101.5 percent of gross domestic product (GDP), more than double the average (56.3 percent ) of 43 countries BIS surveyed.
The Korean economy with high external dependency and trade dependency (74.4 percent in 2023) is greatly influenced by changes in external conditions, particularly the U.S. economy and its Federal Reserve’s policy rate direction, the Chinese economy and global trade.
U.S. inflation seemed to be rapidly approaching the target rate of 2 percent , rapidly falling from 9.1 percent in June 2022 to the 3 percent range in June 2023. It was expected that inflation would further reduce and that the possibility of a policy interest rate cut by the U.S. Federal Reserve in May this year would increase. However, the decline in inflation slowed down due to the sticky inflation effect, keeping the consumer prices still at the 3 percent range and increasing uncertainties about the timing of policy cuts. The policy rate cut is now delayed until July, provided there are no major hiccups.
Uncertainties around the U.S. policy rate move are likely to increase instability in Korea’s foreign exchange rate market and thus the shift in the Bank of Korea’s monetary policy will likely be delayed until after July or later. Taking account of Korea’s high levels of debt of households and small and medium-sized companies, overall economic distress is expected to be prolonged and intensified.
Delayed and weaker-than-expected recovery of the Chinese economy has become a weakness to the Korean economy. While Korea’s exports increased in February, exports to China continue to decline. As of 2023, China is Korea’s largest export market, accounting for 19.7 percent of total exports, followed by the United States with 18.3 percent nd the EU with 10.8 percent . So the recovery of the Chinese economy has a significant impact on the growth of the Korean economy.
Given the continued economic difficulties and polarization, various timely support measures are needed to stabilize consumer prices and restore domestic demand. For instance, the government should release agricultural stockpiles more quickly and proactively and improve the wholesale and retail sales distribution networks to minimize unnecessary cost push factors. With the sticky applation in place, the voter sentiment will remain unfavorable to the government and likely swing to the opposition parties.
More and better assistance should be provided to the vulnerable by strengthening the social safety nets and welfare. Korea’s public social welfare expenditure as a percentage of GDP has increased to 14.4 percent as of 2020 but still far below the OECD average of 23 percent and that of the United States (24.5 percent ) and Japan (24.8 percent).
The continued U.S.-China competition and the fragmented supply chains call for bolder industrial policy measures by the Korean government.
Dr. Song Kyung-jin (kj_song@hotmail.com) led the Institute for Global Economics, based in Seoul, and served as special adviser to the chairman of the Presidential Committee for the Seoul G20 Summit in the Office of the President. Presently, she is executive director of the Innovative Economy Forum.